No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals

Economic

Summary:

American buyers will soon face higher prices for foreign-made goods if President-elect Donald Trump carries out expected hikes in US import tariffs.

On the campaign trail, Trump promised tariffs on all imports from 10 to 20 percent, with a special rate of 60 percent on all imports from China. Goods likely to see the largest proportional price increases are those facing currently low applied tariff rates and those that are sourced disproportionately from China.

Analysis of current trade flows and tariff rates indicates that machinery and electronics and electrical machinery will face the largest import tax burden if the incoming administration implements Trump’s promised duty hikes. These two sectors account for a large share of US total imports, currently face low tariff rates, and are disproportionately made in China. Imports in these industries include both capital goods and producer intermediate inputs and final goods, which implies higher costs and disruptions to American supply chains and manufacturers.

If tariffs are levied on all US trade partners as well as China, large flows of machinery, electronics, transportation equipment, and chemicals will also be subject to new taxes, with much of the burden falling on US-based businesses. Consumers, however, will also see higher costs for imported final goods, including electrical devices, toys and sporting goods, vegetable and meat products, and imported foodstuffs.

HIGHER TARIFFS ON IMPORTS FROM CHINA

Given broad domestic consensus on the need to reduce US dependence on China, and ready access to tariff-levying authority gained from the 2018 investigation of forced technology transfer, we expect President-elect Trump to act quickly to impose new tariffs on imports from China. On the campaign trail, he proposed tariffs of 60 percent on all imports from China.

As shown in table 1, China is the dominant supplier to the United States of toys and sports equipment, provides 40 percent of US footwear imports, and is the source of about one-quarter of US electronics and textiles and apparel imports. It ships 18.3 percent of machinery and mechanical appliances imported by the United States. Of these products, electronics and electrical machinery from China comprise the largest US import bundle by value, totaling $119.9 billion in 2023 (figure 1). Within this broad sector, China is the dominant supplier of many individual products.

No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_1

A tariff of 60 percent on China would be a major shock to international goods markets. After the US-China trade war of 2018–19, 62 percent of US imports from China are currently subject to an average tariff rate of 16 percent, well above most favored nation (MFN) rates but far below the rate promised by Trump on the presidential campaign trail.

Some products remain lightly taxed, as seen in figure 1. Three categories of imports currently face average tariff rates below 10 percent—toys and sporting equipment, minerals, and electronics and electrical machinery. Indeed, partly because of US dependence on Chinese-based production, many products in the electronics sector were largely shielded from trade war tariffs, including cell phones, laptops, and smartwatches. There are few alternative locations for large-scale production of these devices, despite movements in supply chains since the trade war, and a 60 percent tariff would feed through to higher consumer prices for these devices as well as for video gaming consoles and many other consumer electronics. No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_2

No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_2

Consumers will also feel the impact of tariffs on everyday purchases of toys and sporting goods, footwear, and textiles and apparel. Of these sectors, the United States is most reliant on China for purchases of toys and sports equipment. While toys seem like products for which substitute sellers would be readily available, China maintains a dominant position in toy production for several reasons, including its not-easily-reproduced capacity to produce materials that meet US product safety standards. Toys and sports equipment are currently very lightly taxed, as shown in figure 1, and a 60 percent tariff almost certainly will be felt directly by American households.

US businesses will also feel the pain of higher tariffs on China. They are end-users for many of the electronics products and electrical machinery discussed above. But with US imports from China heavily weighted toward capital equipment and intermediate goods used by US-based companies, new taxes on imports of machinery and mechanical appliances will certainly raise costs for American manufacturers. US imports of these products from China, which totaled $81.4 billion in 2023 (second only to electronics), would be subject to a 49-percentage point tariff increase if Trump levies the promised “flat 60” import tax rate.

HIGHER TARIFFS ON ALL PARTNERS EXCEPT CHINA AND FTA PARTNERS

The United States purchased 13.6 percent of its 2023 merchandise imports from China and another 38.3 percent from free trade agreement (FTA) partners; the remaining 48 percent of American imports come from other sources and currently are taxed at MFN rates. As seen in figure 2, even a 10 percent tariff would be a significant increase in the tax rate applied to these purchases. Only three groups of imported products—textiles and clothing, footwear, and hides and skins—currently are taxed at MFN rates that exceed 10 percent (see figure 2). Nevertheless, tariff rates on these products from non-FTA partners are less than those currently levied on similar ones from China.

No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_3

Trade with non-FTA partners includes large two-way flows with the European Union, the United Kingdom, and Japan. Purchases are concentrated in five physical- and human-capital sectors: chemicals, machinery, electronics and electrical machinery, transportation equipment, and miscellaneous manufactures (which includes precision instruments, as described in the appendix below). All would be subject to tariff rate increases of between 7.9 and 9.6 percentage points. The bulk of American imports of these products are used by US-based companies, who would be burdened by higher production costs even if they switch to domestic or alternative foreign suppliers.

HIGHER TARIFFS ON FTA PARTNERS

Almost 40 percent of US imports are sent from FTA partners. Existing tariff rates on these partners are close to zero, with only textiles and clothing and hides and skins facing rates above 1 percent, as seen in figure 3. Consequently, almost all flows would face about a 10-percentage point increase in the applied tariff rate if Trump carries through on his pledge to tax all US imports from FTA partners at the 10 percent rate. A particularly hard-hit sector will be transportation equipment, with 2023 US imports of $235.7 billion from these sources. Within North America, production of cars and trucks is highly integrated, with some vehicles crossing US borders multiple times before completion. It is not clear how these flows would be taxed. South Korea also supplies a significant share of US transportation product imports, and it has emerged as one of the largest foreign investors in the US automobile sector. Clearly, new tariffs on its exports to the United States will affect Korean manufacturers’ US-based operations. No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_4

No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_4

Also caught in the Trump tariff crosshairs are fuel products, machinery, and electronics and electrical equipment. As shown in table 1, FTA partners supply more than half of America’s fuel and transport equipment imports, about one-third of imported machinery, and one-fourth of imported electronics and electrical equipment.

America’s FTA partners are also important purchasers of US exports, particularly Canada, Mexico, and South Korea. They are likely to react to the proposed US deviation from FTA rates with tariffs of their own, reducing access into their home markets for US manufacturers, farmers, and ranchers.

US companies rely on FTA partners for trade that takes place under policy certainty—that is, with the expectation that tariffs will remain at negotiated low rates. Consequently, countries with whom the United States has signed an FTA have been seen as possible locations for production moved away from China. Tariffs that deviate from agreed rates in unpredictable ways make these decisions riskier.

WHAT IF TRUMP HITS MEXICO AND CANADA HARD?

Trump recently threatened tariffs of 25 percent on Mexico and Canada, countries that currently enjoy favored access to the US market thanks to the US-Mexico-Canada Agreement (USMCA). If these tariff increases were to be implemented, the largest flows affected would be those of transportation equipment and machinery, as seen in figure 4. Higher tariffs on USMCA partners would also tax large flows of electronics, miscellaneous manufacturers, and possibly fuel. Currently, the average US tariff applied to imports of goods from USMCA partners is generally below 1 percent.

No Trade Tax is Free: Trump’s Promised Tariffs Will Hit Large Flows of Electronics, Machinery, Autos, and Chemicals_5

USMCA partners are also important sources for the United States of vegetable products (47 percent of total imports), prepared foodstuffs (42 percent of total imports), and animal products (33 percent of total imports). Higher tariffs on Mexico and Canada will, therefore, put upward pressure on US food prices.

KNOWN UNKNOWNS

At this date, we know little about how the Trump administration will implement new tariffs. Fundamental policy designs have yet to be announced, including the tariff rates that will be ultimately applied, if tariffs will be phased in, if any products will be excluded, and whether FTA partners will be exempt. During the US-China trade war an exclusion process was set up allowing firms to apply for tariff exemptions for imports of Chinese machinery used in domestic manufactures. The bulk of these exclusions were allowed to lapse under the Biden administration. Given the blanket application of proposed tariffs and the high rates promised, any exemption process is likely to be swamped with petitions from US manufacturers.

With the United States acting against their interests and in violation of its World Trade Organization (WTO) and FTA commitments, retaliation from trade partners is to be expected. As experienced during the US-China trade war, retaliation can include not only new tariffs on US exports but also other restrictive commercial measures. China deployed countermeasures to US trade restrictions, including blacklisting foreign companies and applying export controls to curtail US access to critical supplies. With Trump’s promise to use tariffs as leverage in negotiations over other policy issues, such as migrant and drug flows, the response of US trading partners is likely to be influenced by the cost of meeting the Trump administration’s demands and by their commercial and security dependency on the United States.

NO TRADE TAX IS FREE

The only certainty is that new tariffs will be costly for the United States. While the ultimate impact on prices will depend on import demand and supply elasticities, research on the US-China trade war found resounding evidence of complete pass-through of tariffs to importers. The implication for the domestic market is that American consumers and firms will bear the effect of higher tariffs, with substantial costs for the average American household, and a burden that falls more heavily on lower income households. Moreover, well anticipated effects of protection are to stymie competition, resulting in higher prices for goods made in the United States as well as those that are imported. Even without the expected retaliation from its trading partners, higher US tariffs adversely affect American companies and exporters.

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