Explaining the Effects of Tariffs on Country GDP

Introduction 

In today’s world, international trade serves as the basis for contemporary economic thought. Tariffs initially served as the ideal option for governments growing the revenue of their countries as well as other taxes, although they would also end up hindering growth of their economies at worst (World Trade Organization, 2017). Starting with the collapse of the Soviet Union, worldwide trade barriers, and especially tariffs, have fallen in different parts of the world. Globalization has contributed to reduction in rates of poverty for the nations that have liberalized trade (Ward, 2018) . Nonetheless, the recent years have witnessed concerns regarding free trade. Since the institution of NAFTA (North America Free Trade Agreement), the U.S. has experienced two recessions. For instance, employment in the U.S. manufacturing sector has declined (Spearot, 2016) . In nominal terms, trade deficit within the U.S. has grown significantly. Certain experts argue that major countries have failed to realize prosperity in free trade. They argue that globalization has led to wealth transfer from rich nations to poorer ones (Soderbery, 2018) . Additionally, various accusations prevail concerning unfair trade practices, especially one related to currency manipulation, which has raised speculations that trade has resulted to the weakening of the U.S. economy while threatening the security of the country. With the election of President Trump in 2016 to serve as the president of the U.S., his protectionist policies have raised issues concerning the free trade concept (Rose, 2019) . He is protecting the country from trading with countries that threaten the welfare of the U.S

According to estimates by various economists, the effects of tariffs on the GDP of the U.S. seem modest presently. Nonetheless, in the event that an all-out trade war emerges with Europe and Asia, the interference with international supply chain would lead the economy to drag even more than the present estimates reveal (Rose, 2019) . In the recent years, for example, countries, such as Europe, China, and the United States appear to be engaging in retaliatory trading activities with the goal of satisfying their individual economic needs (Huang, 2018). Unexpectedly, the ‘trade war’ term seems to be garnering tremendous attention as more countries embark on international trade. Irrespective of what the term entails, research reveals that the U.S. has engaged in several trade policy actions (Bachman, 2018) . These policies mostly relate to tariffs that countrywide security concerns have justified officially. Since trading partners of the U.S. feel that the tariffs that the country adopts are unjustified, they have ended up embarking on retaliatory activities to boost their individual economic interests (Niewenhuis, 2018) . The purpose of the paper is to discuss the effect of tariffs on country’s GDP while emphasizing mostly on countries including the U.S. and China, which serve as major rivals in international trade. It anticipates proving the hypothesis whether tariffs have positive or negative effects toward the GDP of a country

Hypothesis 

Null Hypothesis: Tariffs have a positive effect on a country’s GDP.

Alternate Hypothesis: Tariffs have a negative influence on a country’s GDP.

Research Purpose 

The purpose of the study is to explain the effects of tariffs on GDP, particularly on the U.S. as well as China, which is one of its major trading partners. The research will focus on investigations carried out in books and journals in order to facilitate in coming up with a conclusive analysis of the issue. The study will try to prove the alternate hypothesis that tariffs have negative influences on the GDP of a country while disapproving that tariffs have positive effects on a nation’s GDP. The paper will use the hypothesis to formulate research questions, which the researcher will use to reveal the actual influences that tariffs have on a country’s GDP, while laying emphasis on the U.S. and China. The researcher uses these countries since they serve as rival nations when it comes to exporting and protecting their nations from outside threat. As such, they set distinct tariff policies, which lead to retaliatory efforts by the two. Pillar questions will be formulated that will comprise of sub-questions, which will facilitate in explaining the issues under evaluation further. The assessment will play a critical role in improving understanding how tariffs have influenced the relations that the U.S. has with its trading partners and how they affect the GDP of the countries.

Literature Review 

Implications of Tariffs on U.S. and Its Trading Partners 

According to a survey by  Bachman (2018) , the GDP of the U.S. under certain forms of trade-restrictive administration might be between 1 and 2 percent lower by 2020 in the absence of a trade war with its trading partners. Other studies carried out on the same issue differ based on their assumptions concerning effects of a trade war and how strongly other nations would retaliate to the tariffs that the U.S. imposes (Flash Global, 2019) . However, a consensus prevails among economists that a resultant trade war would not lead to a recession. 

The different models utilized in assessing the influence of trade restrictions usually suppose that it is probable to calculate the implications by multiplying the tariff ’ s size by the import amount in order to obtain impact on price (Dottle, Roeder, & Wolfe, 2018) . When incorporated into a macro model, a reduction in GDP becomes apparent. In the case of the U.S., these kinds of effects are quite modest (Marks, 2018) . For instance, imposing a 25 percent on all imports from China would lead to an overall increase in price by only 0.6 percentage points (Bown, 2018) . This is based on the idea that the imports from China accounted for around 2.6 percent of GDP during 2017 (Bachman, 2018)  . This form of a one-time rise might be tremendously small to generate sustained inflation or result to other macroeconomic issues. 

Certain reasons prevail for exercising caution when imposing tariffs. For instance, the devised calculations might fail to put into consideration the influences of an instant rise in major input price rises (Bown, 2018) . This is due to the influence of the current society ’ s sophisticated international supply chains. Numerous manufacturers within the U.S. utilize more parts from foreign nations to create final products while selling more parts to overseas manufacturers as opposed to the case of the past (Dottle, Roeder, & Wolfe, 2018) . For example, trade in intermediate products, such as engines and parts, which lie in the transportation sector, have been realizing tremendous growth (Marks, 2018)  . When it comes to both motor vehicles and aircraft industries, the value realized from those kinds of exports in 2017 is about double the one realized in 1999. The import value is approximately three times higher (Dottle, Roeder, & Wolfe, 2018) . This serves as the direct outcome of growing supply chains cross-border, such as in the three NAFTA including Canada, Mexico, and the United States. 

To gain increased understanding of the reason as to why this effect matters, it is crucial to assess the oil shock that took place in 1973. During that time, the price of the oil that U.S. imported rose by about thrice (Ward, 2018) . This resembled a tax increase or tariff upsurge on imported oil. However, the major distinction prevailed whereby overseas oil producers as opposed to the case of the U.S. government realized the benefits of the increase in price (Bown, 2018)  . When weighted based on the vital role that imported oil plays in the U.S. economy, oil imports represented the GDP by around half in the U.S (Drysdale, 2018) . This would have had a one-time influence of 1.5 percent on the price levels in the U.S., which is more than the example of China, which depicts a relatively modest effect (Niewenhuis, 2018) . However, the prices of oil ended to leading to the emergence of a deep recession leading oil to appear unique in terms of its influence in the economy (Bhadauria, 2018) . Since energy is crucial for all sectors, the increased in prices were experience everywhere. It was not possible to find products that would replace oil, particularly during the short run (Ward, 2018) . Overall, the sudden rise in the price of oil resulted to rate of unemployment . 

The tariff policies that the U.S. has adopted recently are more modest (Bown, 2018) . However, on the numerous goods that the country imports from China and the supply chain ’ s globalization, companies within the U.S. might end up experiencing problems when operating globally (Drysdale, 2018) . In certain instances, it might not be probable to find import substitutes easily. In other scenarios, the increase in the prices of imports might influence the supply chain in sophisticated ways (Bown, 2018) . For instance, final goods producers might wish to make up for extra costs attributed to intermediate inputs by increasing prices while this would lead the domestic suppliers to compensate with lower prices (Niewenhuis, 2018)  . The local suppliers of intermediates whose services and products are used together with imports would witness demand decline. 

Experts argue that free trade would contribute toward increased profitability of the stock market within the U.S (Drysdale, 2018) . However, would end up declining since the present tariff policies by the U.S. are leading capital stock to depreciate (Ward, 2018) . Companies in the country would thereby find a need for cutting certain operations and laying off employees to allow them continue their operations successfully (Dottle, Roeder, & Wolfe, 2018) . Additionally, the overall activity of the economy would slow down, revealing that the costs attributed to imports from China fetch a significantly small share of the costs in the U.S. Certain key firms have already revealed that tariffs would result to investment curtailment or entire shutdown (Bhadauria, 2018)  . As such, economists are paying close attention to the issue to determine whether the firms making similar decisions will realize a growth that will influence the overall aggregate manufacturing data within the U.S. 

The example of oil crisis of 1973 reveals an additional problem that would result from inefficient tariff policies by the U.S. During that time, the Fed experienced challenges in responding coherently mostly since it needed to deal with elevated inflation, a stalling economy, and increasing rates of unemployment (Bhadauria, 2018) . The reason for this was that economists at the Fed during that time lacked ideal models that would guide them on how the economy would respond with simultaneous increase in rates of unemployment and the rising inflation (Bown, 2018)  . The issue also created a dilemma after the monetary authority experienced a ‘ supply shock ’ of this form. The increasing prices required higher rates of interest to minimize demand whereas the growing unemployment needed interest rate reduction (Dottle, Roeder, & Wolfe, 2018) . Here, the fed faced challenges in dealing with the dual objective of stabilizing prices and realizing full employment. 

The Fed experiences similar dilemma whenever a trade war emerges due to the influence of tariffs (Dottle, Roeder, & Wolfe, 2018) . When it comes to a full-employment economy, it is possible to experience higher inflation due to one-time prices increases and higher tariffs (Niewenhuis, 2018) . In addition, the tariffs might lead the rate of unemployment to grow or realize tremendous rise. In this vein, the fed might be required to opt between high unemployment and rising inflation, which is an unenviable choice (Flash Global, 2019)  . Here, with the present trade tariffs, it is probable that they would result to trade war, which would pose major risks to the GDP of the U.S. and its trading partners 

Effects of US-China Import Tariffs on Their Economies and Consumers 

Research reveals that during March 2018, the United States instituted 10 percent tariffs on aluminium as well as 25 percent imports from nations, such as China. For China, it retaliated on April the same year when it charged between 15 and 25 percent import tariffs on around 128 products originating from the U.S., such as aluminium scrap and waste and other products including fruits, pork, and nuts among others (Magnus, 2018) . Starting with the tariffs that President Trump rolled out, he followed by signing a memorandum, which imposed extra import tariffs on around 1,300 goods from China, while targeting high-tech products (Marks, 2018) . For China, it responded by hiking tariffs whose value resembled the one that the U.S. imposed, including aircraft, autos, and soybeans (Magnus, 2018) . In this sense, it is crucial to focus on the influence of the China and U.S. tariff efforts in their economies as well as consumes thereby facilitate in understanding whether their actions contribute to positive or negative influences toward the GDP of the two nations, which serve as the biggest economies worldwide. 

The tariff actions by both the U.S. and China had significant impact toward their economies as well as consumers. The recent tariffs that the U.S. has directed toward imports from China mostly relate to business-to-business (B2B) goods (Lindé & Pescatori, 2017) . The list of the products that the U.S. imposed tariffs on appear to have been selected with concern for minimizing the effect toward consumers, which might influence the upcoming election results by the Congress (Huang, 2018) . Nonetheless, the tariffs would still result to a rise in prices, which would impact consumers indirectly. This is because companies would react by passing the additional higher production costs to the final consumers. In the event of the side of the Chinese, the new tariffs that the nation imposed toward the imports from the U.S. influence diverse industries, including vehicles, soybeans, chemicals, as well as aircraft (Hayakawa, Ito, & Kimura, 2016) . In retaliation to the tariffs that the Chinese, President Trump issue d threats that he might consider raising tariffs on an additional $100 billion worth of imports from China (Huang, 2018) . These practices continue worsening the state of relationship between the U.S. and China. 

Concerning the present tariffs, they stand at approximately $125 billion, which is around $60 billion on the two sides, which is representative of below 0.1 percent of U.S. or Chinese GDP (Flash Global, 2019) . The tariffs that exist presently have insignificant influence on either the U.S. or China. According to unofficial sources, they claim that China and the U.S. commenced talks relating to trade after the announcement that China made in April 2018 (Eichengreen, 2018) . However, the talks did not become fruitful with the U.S. insisting that China needed to minimize the support it directed toward the high-tech sectors significantly (Felbermayr, Jung, & Larch, 2015) . This resulted when the negotiators from the side of China argued to take precautionary measures that would allow them minimize trade deficit by around $50 billion via encouraging additional imports from the U.S. President Xi of China offered a speech when he promised to minimize import tariffs on products such as cars among others (Drysdale, 2018) . However, the promises made do not seem to be yielding any fruits while the state of trade between China and the U.S. continues to worsen. 

On the influence of the tariffs by China and the U.S., they influenced the B2B sectors in various ways. Regarding the products’ list that administration of the U.S. offered, the new tariffs on trade mostly revolved around electrical equipment, accumulators, rubber products, machinery, electronics, basic chemicals, engines, metals, generators, pharmaceutical industries, and transport equipment (Du, Harrison, & Jefferson, 2014) . In addition, several smaller sectors, including appliances for testing and measuring, industrial control items, and weapons also served as targets (Felbermayr, Jung, & Larch, 2015) . However, concerning the implication of the new tariffs toward prices, they might differ based on industries. The major impact is likely to be experienced on batteries, accumulators, industrial machinery, and electrical equipment products (Dottle, Roeder, & Wolfe, 2018) . In the case of the U.S., it imports over a third of the aforementioned items while a considerable import share originated from China. In this vein, the new tariffs would lead the prices of products to rise considerable while affecting the buyer sectors (Collectif, 2018) . Generally, construction, motor vehicles, construction, machinery, aerospace, and energy sectors would experience the most negative influence. 

The new tariffs might not influence rubber products considerably, including conveyor belts, tires, basic chemicals, measuring appliances, and electronic component sectors (Cirera, Willenbockel, & Lakshman, 2014) . Additional tariffs directed toward components made in China would increase buyer process, although devising an ideal import structure would make it possible to soften the effects (Chaudoin, 2014) . Due to this, the manufacturers from the U.S. might consider replacing the imports from China with production from other nations (Caliendo & Parro, 2015) . Nevertheless, this would still pressure the prices of components while encouraging manufacturers to focus on re-assessing their supply chains (Caliendo & Parro, 2015) . In fact, tariffs directed toward electrical components, rubber products, basic chemicals, and measuring appliances would influence chemicals, motor vehicles, as well as electronic industries. 

Lastly, when considering the tariffs levied on weapons, metals, pharmaceutical products, and transport equipment, they might not have considerable effect (Bhadauria, 2018) . In the event of the aforementioned products, which China makes, they are representative of a significantly small share of the entire structure of the import sector while the manufacturers from the U.S. might focus on replacing the products from China by ensuring to import from other nations (Bhadauria, 2018) . However, the new tariffs might still have influences while creating distractions for the aerospace, motor vehicle, and construction industries (Beshkar, Bond, & Rho, 2015) . Irrespective of the minimal anticipated influence on prices of inputs, the manufacturers might be required to re-assess their structure of supply (Bernstein, 2015) . Additionally, tariffs directed toward certain key components or products with which the switching costs are high might result to price inflation for those consuming weapons, metals, pharmaceutical products, and transport equipment (Beghin, Disdier, & Marette, 2015) . These increases in prices would affect purchases thereby affecting the GDP of the two countries negatively. 

Overall, considering the tariffs existing between the U.S. and China, they are mostly targeting B2B products. Thus, the manufacturers would absorb the probable increases in cost whereas the households would not experience direct increased in prices (Bachman, 2018) . Nonetheless, the tariffs would still result to increases in prices, particularly when it comes to private consumers although indirectly (Beghin, Disdier, & Marette, 2015) . This is because manufacturers would end up passing the increased production costs to the households (Cirera, Willenbockel, & Lakshman, 2014) . In general, the increases in prices on rubber products, automotive products, and electronics are anticipated (Flash Global, 2019) . The increased costs of industrial machinery and related products would impose pressures on the prices of consumer goods, including energy products, textiles, and food products (Navarro & Autry, 2011) . In this vein, the increased tariffs by the U.S. and China would not benefit the GDP of the two nations. Rather, they would experience negative influences (Du, Harrison, & Jefferson, 2014) . As such, they should consider devising tariff approaches, which would allow them to engage in fair trade, which would allow them to realize benefits in their GDPs while embarking on a mutually beneficial trading relationship. 

Regarding the effect of tariffs on GDP of countries, it is crucial to note that they do more harm than good. Whereas certain policymakers and economists argue that protectionist would benefit the economy of a country, others argue that the damages the trading nations would experience would be intense (Drysdale, 2018) . The trade protection policies via tariffs would result to a trade war globally, which might lead to the emergence of a global recession. Others claim that punitive tariffs might lead the public of the trading nations to spat each other (Eichengreen, 2018) . The markets would become nervous thereby leading them to focus on retaliatory measures. For instance, currency depression might seem as ideal response (Dottle, Roeder, & Wolfe, 2018) . Thus, it is crucial to consider the tariffs that nations deploy in a careful manner owing to the dangerous repercussions that would be felt globally and in the domestic market. 

Conceptual Framework 

When looking at literature and case studies regarding the influence of tariffs on GDP, the purpose of the research it to explain the means of surviving tariff restrictions and the strategies for mitigating them in order to boost the overall GDP growth of the U.S. and that of its trading partners. The conceptual framework has been developed with the goal of addressing this purpose. Since this research is mostly descriptive, pillar questions have been utilized as a framework for approaching the purposes.

Table 1 links the two pillar questions to the literature review 

Proposed Conceptual Framework  Title: To Explain the effects of tariffs on a country’s GDP  Purpose: To explain the different ways in which the tariffs affect the GDP of a country
Pillar Question	Literature Support
What is the effect of tariffs on GDP of a country	(Eichengreen, 2018); (Chaudoin, 2014); (Lindé & Pescatori, 2017); (Hayakawa, Ito, & Kimura, 2016); (Caliendo & Parro, 2015); (Beshkar, Bond, & Rho, 2015); (Beghin, Disdier, & Marette, 2015); (Felbermayr, Jung, & Larch, 2015); (Spearot, 2016); (Soderbery, 2018)  (Cirera, Willenbockel, & Lakshman, 2014); (Du, Harrison, & Jefferson, 2014)

Table 1: Proposed Conceptual Framework

Methodology 

The purpose of the study is to explain the effects of tariffs on GDP, particularly the one of the U.S. and its trading partner, China. It utilizes a conceptual framework of a pillar question, which is elaborated in the sub-questions. This paper’s methodology revolves around an evaluation of literature that examines the effect of tariffs in China and the U.S. and whether it is possible for the countries to come up with a solution to the challenges that they experience when it comes to agreeing on favorable trade terms. The tariffs that the U.S. deploys have significant influence on the trading relationship that it has with China and vice versa. To explain the study, the researcher uses journals and books to offer increased understanding of this contemporary issue in today’s globalized world. An explanatory research adopted in this research paper is ideal in fostering effective understanding of the issue in question. Table 1 reveals the conceptual framework depicting the pillar question, which are expanded into sub-questions to offer comprehensive understanding concerning the issue.

The pillar question is operationalized with their sub-questions. These offer more details on the issues under discussion to give an overview on ways in which the U.S. and China among other trading experience the influences of tariffs, which mostly revolve around hindering certain major products from gaining acceptance in a country due to higher tariffs. This way, the paper makes it possible to understand the negative influences that result because of exercising unfavorable terms of trade due to high tariffs. The U.S. is one key area of focus owing to the dominant role it plays in the global economy while China also plays a critical role in the global economy. As such, any tariff barriers would have significant influence on how the countries undertake their trading activities in the global setting.

The paper will operationalize the manner in which tariffs impact both the U.S. and China together with the key products affected by tariffs. This way, it will be possible to determine whether tariffs affect the GDP of a country positively or negatively. In this manner, it will be possible to prove the hypothesis as to whether tariffs have positive or negative influences on the GDP of a country. The from the pillar question, certain questions will be raised regarding tariffs and the relation that they have toward the GDP of a nation. Furthermore, when it comes to the variables, tariffs will serve as the independent variables whereas impact toward the GDP of a country will be the dependent variable. Raising the tariffs between trading partners would lead other nations to retaliate by imposing similar or higher tariffs. In this manner, the trading relationships between the trading countries would be affected negatively which would end up hurting their GDP eventually.

Operationalization Table
Chinese imports the U.S. hikes tariffs	Electrical equipment, accumulators, rubber products, machinery, electronics, basic chemicals, engines, metals, generators, pharmaceutical industries, and transport equipment.
U.S. imports that China hikes tariffs	Construction, motor vehicles, construction, machinery, aerospace, and energy sectors would experience the most negative influence.
Sectors mostly affected by the tariffs between China and U.S.	Conveyor belts, tires, basic chemicals, measuring appliances, and electronic component sectors

Table 2: Operationalization Table

Pillar Question and Sub-Questions

Pillar Question: What is the effect of tariffs on the GDP of a country?

Sub-questions:  Do tariffs have positive influence on the GDP of a nation?  Do tariffs have negative effect toward the GDP of a country?  Does raising tariffs affect trading nations in the same manner?  Does increasing tariffs affect similar industries in different countries?  Is the trading relationship between nations affected because of tariff imposition?  It is possible to come up with an agreement on tariff imposition between nations involved in trading certain key products?  Are tariffs essential in protecting the domestic from foreign rivalry?  It tariff imposition the ideal means of exercising trade protectionism?  Is it possible to bypass the tariffs that other nations impose toward products that originate from a certain country?

Table 3: Pillar Question and Sub-questions for research 

Conclusion 

In conclusion, tariffs have significant influence on the GDP of a country, particularly negative. Recently, the key trading partners in the world, including China and the U.S. appear to be engaging in retaliatory trading activities mostly due to the restrictive tariffs that they have adopted, which hinder the other nations from trading effectively to realize optimal outcomes. As such, a trade war has emerged between these countries since each nation focuses on ways of bolstering its individual GDP at the expense of the other. However, irrespective of the efforts that these nations deploy in an aim to outdo the other, they end up doing more harm than good. The reason for this is that when one country imposes certain trade restrictions, the other reiterates, creating unfavorable terms of trade between them. To deal with the issue, the paper formulated a conceptual framework that focuses on a key pillar question, which targets supporting literature. It aims at addressing the tariff issues to ensure that the U.S. and its key trading partners can realize benefits from their trading activities rather than harm. 

For the conceptual framework, it focuses on the trading challenges between China and the U.S. owing to the harsh tariffs that the two countries direct toward each other. These have led to negative relations between them to an extent that they have failed to come up with an ideal means of streamlining the trade between them. The nations are the major economies in the world while the trade with each other is significantly essential because they deal with various key important items and products. Overall, trade tariffs have major influence toward the GDP of a nation. In the present globalized business environment, countries are reliant on each other for supply of raw materials and other things that they lack. Therefore, it is crucial to have tariff policies that each party would accept in order to foster streamlined trading activities. The tariffs that countries set should be acceptable by their trading partners in order to foster mutual collaboration. In this vein, regarding the case of the U.S. and China, the tariff policies that they adopt should cater for each other ’ s needs. In doing so, the nations would be able to engage in efficient and streamlined trading activities that allow the GDP of these countries to continue growing. 

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