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How Far Will Trump Protectionism Push Up Inflation?

Sebastien Jean and Gianluca Santoni ()

CEPII Policy Brief from CEPII research center

Abstract: The tariff duties already enforced or threatened by the Trump administration are likely to increase costs and prices in the US economy, but by how much? To address this question, we identify and quantify three channels: direct taxation, cost increase linked to taxes on intermediate inputs, and altered pricing strategy resulting from strategic complementarities across firms. Evidence from three recent episodes of additional tariff protection show that our framework provides sensible assessments of ensuing price increases, which usually materialize gradually and do not reach their maximum level for at least four months. We reckon that the additional duties enforced up to December 2018 should increase inflation in the US by 0.25% to 0.38%. Should all US imports from China be hit with a 25% tariff, the total inflationary impact would range between 0.66% and 0.99%. Levying 25% additional duties on imports of autos and auto parts would more or less double down this effect, by adding 0.67% to 1.03% to inflation if all providers are targeted, and 0.47% to 0.73% if Canada and Mexico are excluded. These estimates show that the additional duties considered by the Trump administration, if applied extensively, might push up consumer prices by more than one percentage point. This is far from negligible from the point of view of both consumers’ purchasing power and financial stability, thus potentially seriously limiting the administration’s room for maneuver. The contrast with China is stark; there, the inflationary impact of retaliatory measures is small, and more than counterbalanced by the wide-ranging tariff cuts enforced over the last year.

Keywords: Tariff Duties; Inflation; United States; Protectionism (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Date: 2018-12
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Handle: RePEc:cii:cepipb:2018-23