Do protectionist tariffs hurt those they are meant to protect?

Protective import tariff measures introduced by the United States against products from China, as well as retaliatory actions by China against US products, have achieved more or less the exact opposite of what they were at least officially intended to do, harming firms in the industries they were supposed to protect.

That is the central finding of new research by Peter Egger and Jiaqing Zhu, presented to the 70th Economic Policy Panel Meeting, hosted by the Bank of Finland in Helsinki on 10-11 October 2019.

Their study analyses the early consequences of the trade war between the United States and China by focusing on the stock market reactions of all listed firms in the United States, China and 38 other countries and territories within windows of up to 10 days after multiple tariff announcement events between March 2018 and May 2019.

A key insight from their analysis, which is consistent with rumours from business, is that the protectionist tariffs hurt the domestic firms of the country that implements them – and even more so in the United States than in China.

What’s more, with modern business organised in global value chains, the tariffs are causing extensive collateral damage to untargeted sectors as well as to third countries.