Prof. Shan Hongyu on how protectionism may harm household welfare, rather than benefit domestic labour markets.
Despite intentions to boost income and jobs, have previous US-imposed tariffs really worked? In a recent study, CEIBS Associate Professor of Finance Shan Hongyu together with others examine the impact of these protectionist policies on US households.
The re-election of Donald Trump to the US presidency in November 2024 has ignited widespread discussion regarding the return and escalation of protective trade policies. The US-China Trade War, which escalated sharply in 2018 during the first Trump administration, is now in a new and highly unpredictable phase. Assessing what comes next is increasingly difficult. Despite this, our study of the effects of Trump's first round of tariffs, initiated in 2018 during his first term, may prove instructive in predicting the outcome of the latest stages of the trade way for American households.
While undertaken by the US with the explicit aim of preserving job opportunities and living standards for domestic households, the levying of protectionist tariffs since 2018 has in fact had the opposite effect. Data shows that households in US counties that are most exposed to protective tariffs – i.e.: places in which local employment is highly concentrated in the industries that witness the greatest increases in import tariffs – have been negatively affected by the ongoing trade war.
This is borne out by the following findings:
On average, households in these counties suffered a decrease of $10.26 in weekly wages (compared to a control group of US households with the lowest exposures to import tariffs). This represents a 1.23% reduction in year-on-year wage growth. These households also spent between 1.11%-1.23% less than the control group. Households appear to adjust their consumption by reducing expenditures on non-essential items such as health and beauty products, while maintaining spending on necessities like dairy products, fresh produce, and meat.*
Lower wages, spending, and overall demand reveals that the income shock of the trade war is disproportionately borne by working-class Americans. Rather than safeguarding them, household income and wellbeing are reduced in counties whose economies are more deeply intertwined with China trade.
01
Why don't US tariffs work as intended?
The underlying cause of diminished consumption and household wages appears to stem from a simple fact: the adverse effects of disrupted supply chains outweigh the intended benefits of tariff protection for US firms.
The nature and composition of Chinese exports to the US has changed dramatically over the past two decades, shifting from predominantly consumer goods (e.g. furniture, apparel and footwear) towards intermediate and capital goods (e.g. products sold for resale, or assets used to support the production process like machinery or industrial equipment). In 2001, the split of consumer, intermediate and capital goods in US imports from China was 53.2 / 22.5 / 23.0%. By 2017, this ratio had shifted to 31.8 / 38.8 / 27.5%.
This change highlights the increasingly intertwined nature of US and Chinese industries. They are not only competitive but also complementary. It also underlines the growing reliance of US firms on Chinese supply chains; imports from China are no longer limited to competitors or substitutes. Today, they often represent essential aspects of industrial activity that cannot be easily or cheaply replaced.
The deepening US-China economic relationship means that heightened import tariffs may not fortify local industries, but instead disrupt supply chains, contributing to unfavourable outcomes in the labour market. Protective tariffs may benefit firms competing directly with Chinese imports, but they simultaneously raise costs for firms that offshore production to China or rely on Chinese machinery or equipment. US firms with strong bargaining power may manage to pass these costs on to their Chinese partners, while weaker firms must absorb them, leading to reduced competitiveness.
02
Knock-on Effects are stacking up
As they become less competitive, US firms face the unenviable choice of having to reduce wages, cut jobs, or delay hiring, amplifying labour market pressures. Consequently, households in affected areas tighten their belts, reducing spending on non-essential items to absorb extra costs.
This interconnected reduction of wages and consumption caused by the ongoing trade war suggests that negative supply-chain effects negate or outweigh the limited benefits. While protective import tariffs may offer some shelter for certain local industries, their positive effect on consumption is modest at best.
Even though the introduction of heightened protectionist tariffs is aimed at shielding both US industries and households, our empirical results suggest they are having the opposite effect.
This article summarises the findings of the research paper: "Consumption Response to Protectionism", conducted by Professors Chen Lin, Hongyu Shan, and Da Tian. Chen Lin is a professor at The University of Hong Kong. Hongyu Shan is an Associate Professor of Finance at CEIBS. Da Tian is a professor at Nankai University.
This working paper was published on March 24, 2025. Just over a week later, US President Donald Trump announced a sweeping new set of tariffs, including a 10% baseline on all US imports, which came into effect on April 5. The introduction of custom tariffs followed on April 9, with the European Union facing a 20% raise, and major Southeast Asian economies numbering among the most severely affected – 36% for Thailand, 46% for Vietnam, 49% for Cambodia, and 54% for China. These "reciprocal" tariffs were later suspend for 90 days for all countries other than China, with a universal 10% tariff remaining in place. Further tariff announcements took the US and China's baseline tariff levels on imports from the other to 145% and 125%, respectively. On May 12, the White House and China's Ministry of Commerce released a joint statement reducing these to 30% and 10%, respectively.
* These findings are based on comprehensive records of shopping behaviour of 40,000 to 60,000 US households, continuously surveyed by NielsenIQ between 2004 and 2019.
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