Tariffs Can Improve U.S. Economy, But Global Trade Realities, Retaliation, Could Offset Gains – UC Davis

 

Economic Analysis of Uniform Tariffs and Sustainable Development Implications

Introduction to the Research

A recent study, “Making America Great Again? The Economic Impacts of Liberation Day Tariffs,” published in the Journal of International Economics, provides a detailed analysis of proposed uniform tariff policies by the United States. The research, led by University of California, Davis economist Ina Simonovska, evaluates the potential economic outcomes and significant risks associated with such policies, particularly in the context of global economic stability and the Sustainable Development Goals (SDGs).

Projected Economic Impacts and Global Stability

Potential Gains and Relation to SDG 8

The research models indicate that a unilaterally imposed, optimally designed tariff of 12.5% on all trade partners could yield modest domestic economic benefits. These include:

• A potential increase in U.S. economic welfare by as much as 2.15%.
• A reduction in the U.S. trade deficit by 13%.

While these outcomes appear to align with aspects of SDG 8 (Decent Work and Economic Growth), the report stresses that their realization is contingent upon the absence of retaliatory measures from international partners. The study warns that any retaliatory tariffs would likely neutralize or reverse these potential gains.

Global Interdependence and “Beggar Thy Neighbor” Consequences

The report characterizes the proposed tariff strategy as a “Beggar thy neighbor” policy, wherein one nation’s gains come at the direct expense of its trading partners. This approach fundamentally conflicts with the principles of global cooperation.

1. Impact on Developing Nations: The policy is projected to cause the most significant harm to smaller economies whose exports to the U.S. constitute a large share of their GDP. Nations identified as particularly vulnerable include Canada, Mexico, Ireland, and several Southeast Asian countries. This outcome directly undermines SDG 10 (Reduced Inequalities) by widening the economic gap between nations.
2. Strain on Global Partnerships: By creating economic costs for key allies, such policies risk damaging international alliances and encouraging partners to seek alternative trade relationships. This erosion of cooperation is contrary to SDG 17 (Partnerships for the Goals), which emphasizes the need for strong global partnerships to achieve sustainable development.
3. Supply Chain Disruption: The intricate nature of modern global supply chains means that tariffs can create extensive ripple effects, disrupting production and trade far beyond the initial target. This instability threatens the stable economic environment required to support SDG 8 on a global scale.

Domestic Socio-Economic Consequences and Inequality

Fiscal Realities and Policy Effectiveness

While tariffs are presented as a fiscal tool, the research indicates that their net benefit to the federal budget is conditional. Tariff revenue, estimated to potentially account for up to 5% of the federal budget, would only yield a positive economic impact if used to replace inefficient taxes, such as those on labor. The study concludes that using this revenue for lump-sum transfers to citizens would negate all potential economic gains.

Impact on Households and Businesses

The report highlights significant adverse effects on the domestic population and business sector, creating tensions with multiple Sustainable Development Goals.

• Increased Domestic Inequality (SDG 1 & SDG 10): Tariff costs are shown to fall disproportionately on lower-income households, which spend a larger portion of their income on tradeable goods. This regressive impact exacerbates poverty and inequality, directly conflicting with the aims of SDG 1 (No Poverty) and SDG 10 (Reduced Inequalities).
• Challenges for Industry (SDG 8): Industries that depend heavily on imported goods without readily available domestic substitutes are expected to suffer. Small and medium-sized enterprises (SMEs) are identified as particularly vulnerable, as they may lack the resources to absorb increased costs, threatening business viability and employment in contravention of the principles of SDG 8 (Decent Work and Economic Growth).

Research Contributors

The paper was co-authored by:

• Ina Simonovska (University of California, Davis)
• Anna Ignatenko (Norwegian School of Economics)
• Luca Macedoni (University of Milan)
• Ahmad Lashkaripour (Indiana University)

Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth: The article discusses the economic impacts of tariffs on welfare, employment, and businesses, particularly small- and medium-sized enterprises (SMEs). It explores how trade policy can affect economic growth and the viability of businesses, which are central themes of SDG 8.
• SDG 10: Reduced Inequalities: The article explicitly points out the regressive impact of tariffs, stating that costs “fall disproportionately on lower-income households.” This directly relates to the goal of reducing inequality within a country.
• SDG 17: Partnerships for the Goals: The article’s focus on unilateral tariffs, potential retaliation from trade partners, and the straining of international alliances connects directly to SDG 17, which promotes a global partnership for sustainable development and a fair, non-discriminatory trading system.

What specific targets under those SDGs can be identified based on the article’s content?

SDG 8: Decent Work and Economic Growth

1. Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation. The article implies a risk to this target by noting that “industries that rely heavily on imports that are not easily replaced with domestic alternatives will suffer,” potentially harming their productivity.
2. Target 8.3: Promote development-oriented policies that support productive activities… and encourage the formalization and growth of micro-, small- and medium-sized enterprises. The article directly addresses this target by highlighting that “Small- and medium-sized enterprises could have difficulty navigating the new tariff structure and lack resources to absorb cost increases that larger competitors can manage more effectively.”

SDG 10: Reduced Inequalities

1. Target 10.2: By 2030, empower and promote the social, economic and political inclusion of all, irrespective of… economic or other status. The article shows how tariff policy can work against this target, as “Tariff costs fall disproportionately on lower-income households, who spend a greater share of their income on tradeable goods.”
2. Target 10.4: Adopt policies, especially fiscal… and progressively achieve greater equality. The article discusses the fiscal implications of tariffs, noting that using the revenue for “lump-sum transfers to Americans… would wash out all potential gains,” while using it to replace inefficient taxes could be beneficial. This highlights how the design of fiscal policy related to trade can either increase or decrease inequality.

SDG 17: Partnerships for the Goals

1. Target 17.10: Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system. The article’s analysis of “unilaterally optimally designed tariff” policies and their “Beggar thy neighbor” effects, which harm trading partners, runs counter to the principles of a multilateral and equitable trading system.
2. Target 17.13: Enhance global macroeconomic stability, including through policy coordination and policy coherence. The article warns that unilateral gains from tariffs “would evaporate when trade partners retaliate,” demonstrating how a lack of policy coordination can lead to instability and negative economic outcomes for all.

Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

SDG 8: Decent Work and Economic Growth

1. Economic Welfare: The article mentions a potential rise in “U.S. economic welfare by as much as 2.15%,” which serves as a direct indicator of economic well-being.
2. Employment Levels: The research is cited as “analyzing policy effects on… employment,” implying that changes in employment figures are a key indicator for measuring the impact of the trade policy.
3. Consumer Prices: The analysis of effects on “consumer prices” is mentioned, which is an indicator of the cost of living and economic stability for citizens.

SDG 10: Reduced Inequalities

1. Share of Income Spent on Tradeable Goods: The article implies this as an indicator of inequality by stating that lower-income households “spend a greater share of their income on tradeable goods,” making them more vulnerable to price increases from tariffs.
2. Distribution of Tariff Costs: The finding that “Tariff costs fall disproportionately on lower-income households” is a qualitative indicator of the policy’s regressive impact.

SDG 17: Partnerships for the Goals

1. Trade Deficit: The article mentions that a unilateral tariff could “reduce the U.S. trade deficit by 13%.” The trade balance is a key indicator of macroeconomic relationships between countries.
2. Tariff Rate: The specific “unilaterally optimally designed tariff of 12.5%” is an indicator of the level of trade restriction being imposed outside of a multilateral agreement.
3. Impact on Trading Partners’ GDP: The article notes that for countries like Canada and Mexico, “exports to the United States represent a significant share of their GDP,” implying that a reduction in these exports is an indicator of negative spillover effects from the unilateral policy.

SDGs, Targets and Indicators

SDGs	Targets	Indicators
SDG 8: Decent Work and Economic Growth	Target 8.3: Promote development-oriented policies that support… micro-, small- and medium-sized enterprises.	Differential impact on SMEs vs. large corporations’ ability to absorb cost increases.
SDG 10: Reduced Inequalities	Target 10.2: Empower and promote the social, economic and political inclusion of all… irrespective of economic… status.	The disproportionate share of tariff costs borne by lower-income households.
SDG 10: Reduced Inequalities	Target 10.4: Adopt policies, especially fiscal… and progressively achieve greater equality.	The use of tariff revenue (e.g., for lump-sum transfers vs. replacing inefficient taxes).
SDG 17: Partnerships for the Goals	Target 17.10: Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system.	The implementation of a “unilaterally optimally designed tariff of 12.5%.”
SDG 17: Partnerships for the Goals	Target 17.13: Enhance global macroeconomic stability, including through policy coordination.	The presence or absence of retaliatory tariffs from trading partners.

Source: ucdavis.edu