Effects of the 2018 Tariffs on Washing Machines
By Pierre Lemieux
When President Donald Trump announced tariffs of 20% to 50% on imported washing machines in January 2018, the prediction of economic theory was quite straightforward: the price of all washing machines in the U.S., both imported and domestic, would rise in roughly the same proportion as the tariffs. In an essay for Regulation, (“Putting 97 Million Households through the Wringer“, Spring 2018), I wrote:
Goldman Sachs, an investment bank, forecasts that the price of washing machines will increase by 8%–20% during the first year. This is probably an underestimate and it would not be surprising if prices increase by at least 25%.
My back-of-the-envelope calculation was that this price increase would cost American consumers $1.4 billion dollars.
Three economists, Aaron Flaanen (Federal Reserve Board), Ali Hortaçsu (University of Chicago), and Felix Tintelnot (University of Chicago) just published a working paper on the effects of these tariffs: “The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines.” Their econometric results are not unexpected, but with a twist:
We find that in response to the 2018 tariffs … , the price of washers rose by nearly 12 percent; the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount.
Instead of increasing washer prices by 25%, domestic manufacturers apparently increased them by 12%, and hid another 12% increase on a good of roughly the same price that is usually bought along with a new washer. Why competition did not prevent this differential pricing is unexplained; perhaps there is little competition among the three producers of this industry, especially given the tariff protection?
Flaanen, Hortaçsu, and Tuntelnot estimate that the cost for the American consumer was $1.5 billion (in the first year). This cost minus the $82 million collected by the Treasury in tariffs means that each new job created in domestic production (estimated to number 1,600) will cost $800,000 (during the first year).
The main domestic producer, Whirlpool, which had requested the tariffs, just announced an increase in its profits (“Whirlpool Profit Rises, Helped by Higher Prices, Cutting Costs,” Wall Street Journal, April 22, 2019; “Trump’s Washing Machine Tariffs Stung Consumers While Lifting Corporate Profits,” New York Times, April 21, 2019). No surprise there since that was the real purpose of Whirlpool’s lobbying.