US-China trade war could raise unemployment rates

July 25, 2019
Contact: Greta Guest gguest@umich.edu

illustration of money and the Chinese flag. Image credit: Ilma Bilic

ANN ARBOR—As the trade war between the United States and China continues to ratchet up tariffs on both sides, University of Michigan economists wanted to know what would happen if China boosted tariffs to 25% on all goods imported from the United States.

Not surprisingly, what they found wasn’t good for the U.S. In response to such a tariff, their analysis suggests that unemployment rates would increase by 0.2 to 0.7 percentage points across U.S. states within four quarters. As a frame of reference, a 0.1 percentage point change in the U.S. unemployment rate corresponds to a loss of 160,000 jobs.

Based on historical data, the research team found that an appreciation of a state’s effective trade-weighted exchange rate results in higher state unemployment and lower state gross domestic product, or GDP. They also found that following an exchange rate appreciation, workers tend to slowly leave the state.

“Within the first year, unemployment rises by about 0.4 percentage points before reverting back, whereas population steadily declines by perhaps 0.3% over the first two years,” said Christopher House, U-M professor of economics. “The magnitude of such effects depends on the state’s exposure to international trade.”

Graph of American unemployment in response to a China tariffHouse and co-authors Christian Proebsting, who earned his Ph.D. in economics at U-M and now works at Ecole Polytechnique Federale de Lausanne, and Linda Tesar, U-M professor of economics, studied the impact of changes in real exchange rates on economic activity across U.S. states, finding that the impact is greatest during periods of economic slack.

The researchers used their findings to conduct a counterfactual simulation of recent developments in U.S.-China trade relations. In response to the recent increase in U.S. tariffs on Chinese imports under President Trump, China retaliated by raising its own tariffs on U.S. exports.

The researchers found that an increase in the price of U.S. exports to China of 25% (an approximation of the impact of retaliatory tariffs by China) would cause U.S. unemployment rates to increase by 0.2 to 0.7 percentage points.

While many states export less than 1% of their GDP to China, this number is substantially higher for some states, especially in the Northwest. The states with the greatest export shares to China are Alaska, South Carolina, Oregon and—reaching about 5% of state GDP—Washington.

“While exports to China are mostly concentrated in a handful of states, the tariff increase would be felt throughout the United States because integrated goods and factor markets transmit the shocks even to states that export little to China,” Proebsting said.

The states with the greatest direct export exposure suffer the largest increases in unemployment, with unemployment rates in Washington rising by 0.78 percentage points over the first four quarters.

 

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