As countries plan how to shield the president, a New York survey shows that American businesses will also struggle to break even if the president enacts his proclamations.
The reason is that global supply chains are complex and countries hit by tariffs will retaliate.
Why Tariffs Could Hurt American Businesses
The rationale for imposing tariffs on imported goods is to protect American businesses from foreign competition. Tariffs will make imported goods more expensive and shift Americans to domestic goods, boosting American industry.
A previous New York Fed study found big losses for the US from the US-China trade war. During 2018-19, the US imposed import tariffs of 10 to 50 percent on more than $300 billion worth of Chinese imports. dollars and, in response, China retaliated with steep tariffs of its own on American exports. Estimating the total impact of the trade war on the US economy is difficult because tariffs can affect the economy through many different channels.
In addition to changing relative prices, tariffs can affect productivity and economic uncertainty. Furthermore, these effects may take years to become apparent in the data, and it is difficult to know what the future effects of a tariff will be.
In the recent study, central bank economists looked at cross-sectoral patterns looking for parts of the economy that may have benefited from import protection. “What we find,” they report, “instead, is that most firms suffered large valuation losses on the days the tariffs were announced. We also note that these economic losses translate into future declines in profits, employment, sales and labor productivity.”
Tariffs and the shrinking of industry
To understand how tariffs can cause domestic industry to shrink, a distinction must be made between input and output tariffs. Typically, the focus is on tariffs on industry outputs. For example, higher tariffs on cars can protect the domestic auto industry because the higher price of imported vehicles, including tariffs, causes consumers to switch to domestic cars.
But US import tariffs were largely imposed on industry inputs, for example, steel. Input tariffs increase the cost of producing final goods such as automobiles in the US, making domestic production less competitive. However, foreign companies do not have to pay for these tariffs when they produce in their markets. As a result, higher input tariffs make it more difficult for US producers to compete with foreign firms exporting to the US market or to US export markets.
Whether US firms benefit from import protection depends on the net effect, the “effective rate of protection.” The fact that US tariffs affected industry inputs more broadly than outputs “foreshadows our conclusion that most US firms suffered a net loss. In addition, US import tariffs imposed during the trade war resulted in China retaliating with high tariffs on US exports, making US exports less competitive in China, leading to losses in their export sales revenue.” , the research highlights.
Businesses performed worse in the stock market on tariff announcement days
The survey recorded the stock returns of all publicly traded companies in the US on the days of any major tariff announcements during 2018-19. The reason is that stock price movements since these announcement dates are closely related to future cash flow movements.
The chart below shows the entire distribution of US publicly traded stock returns on days without tariff announcements (in blue) and on days when tariffs were announced (in red). The chart shows that the entire distribution of corporate stock returns is shifted to the left, meaning that the announcement of tariffs tended to lower US stock prices.
Most of the tariffs announced were on imports from China, and businesses with exposure to China are expected to suffer the biggest losses. A firm that was directly exposed to China through imports from China or sales to China (either through exports or sales through a subsidiary) had a worse stock market performance than those without direct exposure. Since data reveals that half of US listed companies are exposed to China through one of these mechanisms, the trade war has directly affected many of the largest US companies.
Central bank economists focused on whether movements in corporate stock returns accurately reflected forecasts of future corporate performance. Using annual data for the period 2013-2021, they examined the correlation between stock price movements on tariff announcement days during the period 2018-19 and actual future results for the period 2019-2021. “We found,” the research notes, “that firms with lower stock returns around announcement dates experienced lower earnings, employment, sales, and labor productivity.
»We find that a decline in a firm’s stock price on tariff announcement days is associated with a significant decline in firm performance between 2019 and 2021. Specifically, a decline in a firm’s stock price by one standard deviation (decrease market value by 0.56%), linked to a 12.9% drop in profits, 3.9% in employment, 6.7% in sales and productivity by 2.2%”.
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