Principal investigator: Eduarda Miller Figueiredo
Original title: The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines
Authors: Aaron Flaaen, Ali Hortaçsu and Felix Tintelnot
Location of the Intervention: United States
Sample Size:
Sector: Public sector
Primary Variable of Interest: logarithm of the price
Type of Intervention: Tariff changes (antidumping)
Methodology: OLS
Summary
In 2018, the United States imposed a series of tariffs on various products – largely originating from China – using a variety of trade policy measures. The article studied here focuses on a final consumer good – washing machines – and provides evidence of the effects of trade policies on trade flows, domestic production, and, most notably, prices. Using data for the United States, the authors find that retail prices increased only modestly after the tariffs. antidumping and import prices decreased even after the duties antidumping.
- Policy Problem
Trade policy took center stage in economic policy debates in the United States in 2018. In 2018, the United States imposed a series of tariffs on various products – largely from China – using a variety of trade policy measures. One of the several issues surrounding these policies is the incidence of tariffs, that is, whether the value of import taxes is passed on to consumers in the form of higher prices or absorbed by foreign producers, reducing their export price.
The article studied here focused on a final consumer good – washing machines – and provides evidence of the effects of trade policies on trade flows, domestic production, and, most notably, prices. Using the available data, the authors calculated the tariff elasticity of consumer prices, which measures the price variations across the entire range of goods available to consumers (imported and domestically produced) relative to the average variation in the tax applied to those goods through import tariffs.
- Implementation and Evaluation Context
Literature already provides some evidence regarding the response of multinational companies to tariff changes. Horstmann and Markusen (1992) show that, in response to an import tariff, a foreign multinational may establish a factory in its country of origin, which could lead to lower domestic prices than without the tariff. Blonigen (2002) studies the tariff-jumping behavior of foreign companies in relation to tariff measures. antidumping US decisions in the 1980s noted a small, economically insignificant increase in the likelihood of a foreign company establishing production in the US in response to the decisions. antidumping[1].
The first round of trade policy measures against imported washing machines consisted of duties. antidumping specific to each country, targeting specific companies that produced in specific locations. Thus, the rights antidumping They were initially imposed on Mexico and South Korea in 2012, and in 2016 they were applied to China. The second round of measures decreed "safeguard" tariffs.[2] In virtually all countries of origin for washing machine imports to the United States, companies shifted production following each new trade policy: first from South Korea/Mexico to China, then to Thailand/Vietnam, and finally to the United States, avoiding import tariffs.
With the changes in production and trade flows, significant price movements occurred. In the 12 months following the application of the rights antidumping In South Korea and Mexico, the consumer price index (CPI) for washing machines decreased by about 5% after the implementation of the tariffs. In China, the CPI maintained its trend. However, the CPI increased in the months following the "safeguard" tariffs, rising by about 9% by February 2019.
The third round of tariffs imposed on Chinese imports occurred in September 2018, including refrigerators and electric and gas stoves.
- Policy/Program Details
To more fully assess the impacts of these tariffs on prices, the authors used detailed weekly data on retail prices of major household appliances. Their concern in comparing washing machine prices before and after the changes in trade policy was the presence of other shocks that altered washing machine prices independently of the trade policy under study. Therefore, other household appliances were used as control products for the variation in washing machine prices.
As demonstrated in panel A of Figure 1, imports increased in late 2017 and early 2018 as producers rushed to ship washing machines to the United States before the tariffs took effect. Subsequently, imports fell sharply in February and March 2018. Beyond the supply chain effects, US policy also had notable implications for third-country trade flows. Panels C and D of Figure 1 show how Canadian and Korean consumers were affected by the trade policy.
Figure 1: Commercial Flows of Washing Machines and Washing Machine Parts
Sources: US International Trade Commission; Korea Customs Service. Canadian International Merchandise Trade Database.
- Assessment Method
For the study, the authors used data from Gap Intelligence (2013-2018), a market research company that collects data from a wide range of products and markets in the US. The raw dataset contains weekly entries of price and product feature data at the retail model level, from March 2013 to December 2018. In addition to the reported retail price, data on brand, model, release date, and various other product features were observed.
To estimate the effect on the price of the rights. antidumping Against China (July/2016) and the "safeguard" tariffs (February/2018), a regression was performed where the dependent variable is the logarithm of the price and the explanatory variables include product characteristics and fixed effects of retailer and year-week, in addition to an interaction of each category with weekly fixed effects.
- Main results
Baseline estimates suggest a price increase of only 1,5 to 3,5 percent for washing machines and dryers over the 4 to 8 month period. Estimates using fixed effects from the model show slightly higher coefficients; although price estimates for the two placebo appliances suggest that not all of this increase occurred because of the tariffs. In contrast, the estimated effects on prices from the “safeguard” tariffs are more impressive. The results suggest that the price of washing machines increases by about 11% in the 4 to 8 months after the application of these tariffs. And in this case, the estimates relating to the alternative specification – with fixed effects – remain essentially unchanged.
The authors also calculated the correlations in sales rankings for washers and dryers of the main brands they studied, since they are usually sold together. The data provided clear evidence of complementarities between washers and dryers.[3].
Evidence shows that, overall, washers and dryers experienced notable price increases following the 2018 “safeguard” tariffs. Multiplying these estimates by the average pre-increase price of washers ($749 per unit) and dryers ($809 per unit), the price increase in dollars attributable to these tariffs was $86 per unit for washers and $92 per unit for dryers.
Since the tariffs in question were not applied uniformly across all models, these estimates could mask much larger price changes by foreign producers, with little or no price change for domestic products. To explore this heterogeneity, the authors repeated the regressions, but allowing separate coefficients for each brand. The estimates show that all major brands increased prices following the “safeguard” tariffs. There is no clear distinction between domestic and foreign brands, all within a range of 5% to 17%.
Regarding the tariff elasticity of consumer prices, the results suggest a wide range of tariff elasticity for consumers. The estimate suggests for the rights antidumping The 2012 comparison with South Korea and Mexico indicates a decline in prices and therefore a negative elasticity. The results demonstrated markedly different effects on consumer prices between single-country and multi-country tariffs. The authors further highlight that price increases by domestic competitors and complementary goods can raise this elasticity well above one.
- Lessons in Public Policy
The relocation of production plays a significant role in extending the transmission of tariffs to prices. Retail prices increased only modestly after the tariffs. antidumping imposed in China in 2016 and import prices decreased even after the duties antidumping from South Korea and Mexico in 2012.
Domestic producers raise prices following the "safeguard" tariff by a margin similar to that of importers. Price increases for domestic brands are consistent with an oligopoly model, where prices are entirely strategic.
References
Blonigen, Bruce A. 2002. “Tariff-Jumping Antidumping Duties.” Journal of International Economics 57 (1): 31-49.
Holden, P. A dictionary of international trade organizations and agreementsRoutledge, 2011.
Horstmann, Inácio J. and James R. Markusen. 1992. “Endogenous Market Structures in International Trade (Natura Facit Saltum).” Journal of International Economics 32 (1): 109-29.
[1] Antidumping practices"Trade defense mechanisms, employed by countries that accuse foreign companies of predatory pricing, are regulated by the WTO" (Holden, 2011).
[2] Safeguard tariffs: It is a temporary import restriction that a country may impose on a product if imports of that product increase to such an extent that they cause, or threaten to cause, serious harm to a domestic industry that produces a similar or directly competing product.International Trade Administration, https://www.trade.gov/trade-guide-wto-safeguards)
[3] The correlation between sales ratings for a particular brand of washers and dryers at a given retailer is quite high, ranging from 0,9 to 0,95, and typically lower, ranging from 0,3 to 0,9, for other pairs of appliances.
