Most everyone knows that new US tariffs were announced on imports of a variety of products from China that collectively represent about $50 billion in annual imports into the US. The US last week then announced an additional round of tariff hikes on imports from China.
Economist Fernando Leibovici of the Federal Reserve Bank in St. Louis recently published some analysis on the nature of the imported products subject to the tariffs and how that might impact manufacturers in the US, and the results are interesting to say the least.
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| The motor vehicles, trailers and semi-trailers and the computer, electronic and optical equipment industries purchase around 30% of their intermediates from abroad. |
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Leibovici's analysis looks only at imports from China raised in the first round of tariffs.
Think the tariffs fall largely on the consumer goods that US retailers and consumers have been buying from China in droves for two decades? Think again.
There are basically three types of imported goods: (1) consumer goods; (2) capital equipment; (3) intermediate inputs.
That third category represents components and materials – auto parts, for example – that are used to make other final products, like a finished car.
The graphic below shows that imports of production inputs (capital equipment and intermediate inputs) account for nearly all of the total import value among the goods affected by the tariff hike. Consumer goods comprise a mere 1% of the total.
While higher tariffs "could benefit some domestic firms by improving their competitiveness vis-à-vis the rest of the world, raising tariffs on production inputs may end up hurting them by raising their costs of production," Leibovici notes.
His research found that US manufacturing industries use intermediate inputs very intensively, with expenditures on intermediates accounting for 64% of the total value of production on average. Of that, 22% of the total expenditure on intermediates is purchased from abroad.
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"This evidence suggests that raising tariffs on intermediate inputs may have a significant negative impact on US manufacturers," Leibovici says. "By raising the price of intermediates, the recent tariff hike may force US manufacturers to raise prices, thus hurting consumers and leading to cuts in production."
He further found the share of share of intermediates to total value of the finished good was particularly high in some of the US' largest industries. For instance, it was 84% in the motor vehicles, trailers and semi-trailers industry (8.2% of total U.S. manufacturing output) and 75% in the food products, beverages and tobacco industry (15.0% of total U.S. manufacturing output).
But the intermediate goods can come from offshore or domestic suppliers. On one end, the motor vehicles, trailers and semi-trailers and the computer, electronic and optical equipment industries purchase around 30% of their intermediates from abroad. On the other end, the food products, beverages and tobacco and the pulp, paper, paper products, printing and publishing industries only source around 10% of their intermediates internationally – and of course not all from China – but regardless should feel a modest impact from the new tariffs as a result.
Netting it all out, "One thing is clear," Leibovici concludes. "All industries within the US manufacturing sector make intensive use of intermediate inputs and source at least 10% of these internationally. Insofar these imported intermediates are hard to substitute with domestic counterparts, then they are likely to have a significant impact on the functioning of US manufacturers."
Or, SCDigest will add, the price business and consumer customers will now have to pay.
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