The ongoing trade tensions between the United States and China have reshaped global economic dynamics, with far-reaching consequences that extend beyond international relations. While research has highlighted the macro-level impacts, little attention has been given to how these trade policies affect everyday American consumers.

Professor Xu, of Peking University, together with a team of researchers from China and Denmark, has conducted a comprehensive analysis of the US-China trade war’s impact on American household consumption. It brings together perspectives from China, the USA and Europe, ensuring a balanced and comprehensive analysis of a complex global issue.

The findings offer a nuanced understanding of how tariffs affect different income groups and challenge some common assumptions about trade protectionism. Professor Xu and the research team utilised detailed household expenditure data from 2016 to 2019, covering the period before and during the implementation of significant US tariffs on Chinese goods. Using a powerful and scientifically rigorous economic model, the researchers traced how tariffs affected the cost of living for American households. Their method is especially effective at capturing how changes in product variety influence living costs. Typically, when consumers have more options to choose from, they enjoy lower costs of living and greater satisfaction by being able to switch between different goods and enjoy a wider range of products.

One of the study’s most striking findings is that the US-China trade war resulted in a significant increase in the cost of living for American consumers. On average, the additional tariffs imposed by the US on Chinese exports led to a 1.09% increase in household living costs. While this may seem modest at first glance, it represents a substantial burden when applied across millions of households.

However, the true story lies in how this burden is distributed. The research reveals that lower-income households bear a disproportionately large share of this increased cost. Specifically, households in the highest 20% income bracket experienced a 0.9 percentage point smaller increase in their cost of living compared with those in the lowest 20% income bracket. To put it simply, the increase in living costs for the poorest households is estimated to be twice as much as for the wealthiest.

This finding challenges the notion that protectionist policies primarily benefit working-class Americans. Instead, it suggests that such measures may actually exacerbate economic inequality. But why do we see this disparity? The researchers identified three main channels through which tariffs affect household costs: changes in average prices, shifts in expenditure patterns, and changes in product variety. All three channels contributed to the overall effect, but their impacts varied across income groups.

The increase in living costs was primarily driven by higher average prices and a reduction in product diversity. However, these effects were partially mitigated by consumers reorganising their spending patterns across products.

Crucially, the study found that higher-income households were more adept at adjusting their expenditure shares across products. This greater flexibility allowed them to better absorb the shock of tariff-induced price increases. Additionally, wealthier households experienced a smaller reduction in the variety of products they consumed.

In contrast, lower-income households faced more significant constraints. When confronted with price increases, they were more likely to completely eliminate certain products from their consumption basket and had less ability to adjust their spending on remaining items.

These findings highlight a novel channel through which trade policies can affect inequality – one that hasn’t been extensively explored in previous research. While earlier studies have focused on how trade impacts income distribution through labour market effects, this research demonstrates that consumption patterns play a crucial role as well.

The implications of Professor Xu and colleagues’ study extend far beyond academia. As nations around the world grapple with the temptation of protectionist policies, this research serves as a stark reminder of the hidden costs of such measures. While tariffs may be implemented with the intention of protecting domestic industries or addressing trade imbalances, they can have unintended consequences that disproportionately harm the most vulnerable members of society.

Moreover, the study underscores the enduring benefits of free trade – a principle that has consistently allowed countries to reap the rewards of globalisation over past decades. By facilitating the exchange of goods and services across borders, free trade has historically led to lower prices, greater product variety, and increased economic efficiency. This research suggests that moves away from free trade principles can quickly erode these benefits, with the heaviest burden falling on those least able to bear it.

As we look to the future, the insights from this study are particularly relevant. With the potential for continued trade tensions and the rise of economic nationalism in various parts of the world, policymakers must carefully consider the full spectrum of effects that trade barriers can have on their citizens.

Professor Xu and the team emphasise that their findings should prompt a re-evaluation of trade policies, particularly in the United States. The series of tariffs imposed not only led to increased product prices and reduced variety but also exhibited heterogeneous effects that may further entrench social divisions within American society.

This international study provides compelling evidence that trade protectionism can be far more costly than often recognized. By disproportionately affecting low-income households and potentially exacerbating inequality, protectionist measures may undermine the very goals they aim to achieve. As nations navigate the complex landscape of global trade, this research serves as a powerful reminder of the enduring value of free trade principles and the need for careful, evidence-based policymaking that considers the welfare of all citizens.