February 1, 2017

Which States Will Be Hit Hardest by Trump's Tariffs?

Adam Millsap

Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University
Summary

Trade helps spread technology around the world, which stimulates innovation and economic growth in poor and rich countries alike. Trade also ensures that firms operate efficiently by exposing them to foreign competition, which tends to drive down prices for consumers. More innovation and more efficient firms create a higher standard of living for people in the U.S. and around the world. Ignoring this reality will harm a lot of people.

So far President Trump has largely kept his promise to crack down on trade and immigration. First, he squashed the Trans-Pacific Partnership (TPP). Next, he issued an executive order to halt the flow of refugees from certain countries. These actions are evidence that Trump is likely to continue to push his protectionist trade policies going forward, including import tariffs on certain goods.

Whether import tariffs lead to an all-out trade war is uncertain, but it’s certainly possible that U.S. tariffs on goods from places such as China and Mexico would be met in kind. Consumers in every state are hurt by tariffs on imports since they raise prices, but retaliatory tariffs would likely harm some state economies more than others since the importance of exports to a state’s economy varies, as shown in the figures below.

The first figure shows each state’s exports as a percentage of gross state product (GSP) in 2015, the most recent year data are available from the U.S. Census and BEA. This identifies which states are likely to be hit the hardest by policies that harm firms’ ability to export.

Louisiana, Washington, Texas, South Carolina and Kentucky exported the most relative to the size of their economy in 2015, while Wyoming, Oklahoma, Maryland, Colorado and Hawaii exported the least.

The export data collected by the census bureau are not perfect. For example, the exports from states with large points of product consolidation and large ports, such as Louisiana and Washington, are likely overstated. But these measurement errors don’t change the fact that the economies of both Louisiana and Washington—as well as Texas, South Carolina and others—have a large export component that encompasses production, distribution and shipping. Policies that make exporting more costly are likely to harm them.

In many of the Rust-Belt states that went for Trump, exports make up a substantial portion of their economies: Michigan, Indiana and Ohio are all in the top 15 in the figure above. The economies of these states went through tough times in the late 20th century, but eventually they adapted (at least partially) and today exports remain a significant part of their local economies.

If Trump follows through on his campaign rhetoric and targets China and Mexico in particular, which states have the most to lose? The figure below shows each state’s exports to Mexico (black) and China (gray) as a share of GSP.

Exports to Mexico and China made up about 6.5% of Texas’ GSP, with Mexico being the largest destination. Louisiana’s exports to the two countries were about 5% of GSP, and were split nearly evenly between the two, while Washington’s exports primarily went to China. There is an intuitive geographic pattern across many of the states, with southern states’ exports primarily destined for Mexico and Pacific states exports primarily destined for China.

The economic relationships between people and firms in different states and across industries are complex, so it’s difficult to predict exactly how tariffs that target China and Mexico would impact each state. But it's reasonable to expect that local economies that export large amounts of goods to China and Mexico would be hit the hardest if policies were enacted that disrupted such trade.

This means states with fewer exports to China and Mexico, such as Montana, Maryland, Wyoming and Hawaii, will likely be less affected by China or Mexico-specific tariffs —at least in the short run—than Texas, Louisiana, Washington and Arizona.

Exports to China and Mexico from the Rust-Belt states Michigan, Iowa, Indiana and Illinois accounted for about 2% of each state’s GSP, not a trivial amount. As mentioned previously, these states had to adjust once before when globalization exposed them to foreign competition, and any new tariffs will kick off new, economically painful adjustments in the near term as firms reorganize supply chains in response to changes in costs. U.S. senators and representatives from states with relatively large amounts of exports would be wise to remember that many of their constituents work for firms that will be adversely affected by these adjustments.

Ultimately, everyone should be concerned about Trump’s tariff proposals since in the long run less foreign trade will harm the entire country. Trade helps spread technology around the world, which stimulates innovation and economic growth in poor and rich countries alike. Trade also ensures that firms operate efficiently by exposing them to foreign competition, which tends to drive down prices for consumers.

More innovation and more efficient firms create a higher standard of living for people in the U.S. and around the world. Ignoring this reality will harm a lot of people.