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.
READER COMMENTS
Jon Murphy
Apr 23 2019 at 10:59am
Another possibility is the steel tariffs rose everybody’s price of steel?
Hazel Meade
Apr 23 2019 at 11:10am
I don’t know how much steel is in Washing machines. However, tariffs were also imposed on aluminum, so that might be a factor.
Jon Murphy
Apr 23 2019 at 12:44pm
I could be wrong, but I think steel is often used for the casing
Matthias Görgens
Apr 23 2019 at 1:14pm
The NYT article linked suggests that rising input costs weren’t too blame.
Pierre Lemieux
Apr 23 2019 at 5:30pm
Flaanen et al.’s econometric analysis controls for the steel and aluminum tariffs (which came a bit later) and they find that they only had a much smaller effect anyway.
Craig
Apr 23 2019 at 3:56pm
“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?”
1. Tariff imposed at border on wholesale price priced by transnationals.
2. See Whirlpool 10K p41 where Whirlpool complains LG and Samsung are evading the tariff by moving production to countries not covered by the anti-dumping.
I would suggest likely reasons why price impact of a tariff is dampened here.
Pierre Lemieux
Apr 23 2019 at 10:08pm
Craig: I must say that I haven’t read the 10k (which may have been written by the same lawyers who wrote the petition for safeguard tariffs!), but Whirlpool complaining against its competitors would not be new. Your first point is well taken.
Craig
Apr 24 2019 at 10:29am
Well Whirlpool biased for Whirlpool. Their assertion meets the smell test though. They employ the word ‘evade’ and in that use, ie instead of ‘avoid’ they reveal their bias. But LG and Samsung should be avoiding. That’s normal, they’re taking the ‘shunpike’ and also knowing this was coming they also likely boosted pre-tariff inventories to weather the storm.
Ken P
Apr 23 2019 at 9:09pm
The complimentary good effect is interesting, but the total effect is much less than I expected from prices I see.
On January 21, 2018 I purchased a waching machine because mine was on its last leg and was worried about the potential impact of tariffs. I paid $689 for a Whirlpool Cabrio top load Model WTW8500DC on sale and it included free shipping and zero pct interest. It is on sale at the same store currently without free shipping for $1169 which is similar in price to sales I have seen at other stores recently and similar to a quick web search I just did. That is a 70% increase.
I know this is only anecdotal but it makes me wonder if something is wrong with the data. I often check out the machines at Lowes, Home Depot, Best Buy, Nebraska Furniture Mart… and the prices seem to be night and day different from a year ago.
Pierre Lemieux
Apr 23 2019 at 10:04pm
Ken: Flaanen et al.’s data cover 11 months from February 2018 to December 2018. If their data are correct, the price increase you report would be a big outlier. Here is what they write about their dataset:
I would not be surprised myself to find that Flaanen et al.’s estimate is on the low side and that their complementary-good explanation is questionable, but a more careful study of their paper would be needed (at the minimum).
Mark Brady
Apr 25 2019 at 2:19am
Did you see Dean Baker’s “Coming Clean on Washing Machine Tariffs”?
http://cepr.net/blogs/beat-the-press/coming-clean-on-washing-machine-tariffs
I suggest that it’s worth a look.
Pierre Lemieux
Apr 28 2019 at 9:18pm
Thanks, Mark. I don’t find his general-equilibrium figures very persuasive.
Comments are closed.