Flaaen et al. on Washing Machine Tariffs in the A.E.R.

Trump’s early 2018 tariffs on washing machines are costing American consumers $1.5 billion a year in higher prices, even after deducting the meager $82 million in customs revenues. The whole tariff was paid by American consumers in higher prices—in fact, even more than the whole tariff if we consider that dryers, a complement good, also increased in price. The total cost to American consumers amounts to more than $800,000 a year for each of the 1,800 jobs created in America by the tariff.

These are the main results of an econometric study by three economists, Aaron Flaaen (Federal Reserve), Ali Hortaçsu (University of Chicago and NBER), and Felix Tintelnot (same affiliations as the latter). Their article was published in the latest issue of the American Economic Review under the title “The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines” (the article is not gated). I previously mentioned on Econlog the authors’ preliminary research on the same topic as published in March and April 2019.

Another lesson of the washing machine tariffs, which is not surprising either, is that the tariffs have had the same impact on the price of domestically produced washing machines as on imported ones. I explained in a few previous Econlog posts why a tariff always increases the price of the domestic substitute as much as the price of the targeted imported good (see, for example, “Post Scriptum on Steel Tariffs,” December 5, 2018). A simple way to see this is to realize that the very reason domestic producers ask for a tariff on the competing foreign goods is to be able to increase their prices at the level from which they had to cut them because of this competition.

Flaaen et al.’s estimates are not too far from the results of my back-of-the-envelope calculations the Spring issue of Regulation (“Putting 97 Million Households through the Wringer”). More than a praise for your humble blogger, this is a vindication of the usefulness of economic reasoning.