Tariffs Tax the Poor More: Evidence from Household Consumption During the US-China Trade War

Abstract

Using disaggregated household expenditure data, we provide novel evidence on how the US-China trade war has differentially affected US households across income groups. The analysis is based on a highly flexible, nested CES framework with time-varying, household-specific demand shifters. We estimate the key parameters of the model to recover household-specific price indexes. The increases in US tariffs on Chinese products between 2018 and 2019 led to a 1.09% increase in the cost of living of households, with a relatively larger impact on low-income households. In fact, we document a 0.88 percentage point smaller increase in the cost of living for the top 20% income households relative to the bottom 20%. This differential effect is attributed to wealthier households' greater ability to adjust their expenditure shares across products and to face a smaller reduction in product variety.

Keywords: US-China Trade War, Tariffs, Income Inequality, Distributional Effects of Tariffs, Household Consumption

JEL Classification: F14, D31, F13