The Consumption Response to Protectionism

This paper investigates the impact of U.S. import tariffs on the household consumption in the United States. Despite its intent to protect income and job opportunities in counties with higher exposure to protectionist measures, our analysis reveals that households in these areas experience reduced consumption levels five quarters after the trade war began, compared to those in less-exposed counties. This trend persists even after accounting for exposure to retaliatory tariffs. The decline in both consumption quantities and prices suggests a demand-driven contraction. Further, the reduction in consumption is closely tied to falling wages. The adverse effects are more pronounced where local firms face increased upstream import costs. Our findings highlight the significance of vertical integration between U.S. and Chinese firms within the same industries targeted by U.S. tariffs. Increased import tariffs do not necessarily benefit domestic firms and may risk local household welfare.