Trump's tariffs could cost households $2,600; CHIPS Act spurs US chip construction; US-China are decoupling—EU-China is not; and more.

This is PIIE’s LinkedIn newsletter PIIE Charts, visually recapping our latest research every month. For weekly updates on new research, events, what we’re reading, and more, subscribe to our flagship newsletter PIIE Insider here.

In recent campaign events, former president Donald Trump mused that he might impose even higher tariffs than those he proposed earlier this campaign season. A recent Policy Brief, Clausing and Lovely (2024), examined the many downsides of Trump’s tariff proposals, including a 60% tariff on all imports from China and a 10% across-the-board tariff on imports from everywhere else. Trump’s latest statements show he’s now considering tariffs of up to 20% on most imports.

Imposing a 20% across-the-board tariff combined with a 60% tariff on China would cost a typical US household in the middle of the income distribution more than $2,600 a year. That’s up from the $1,700 loss in after-tax income that would result from his earlier plan.

A recent blog post, Clausing and Obstfeld (2024), analyzed the harm that would come from Trump’s earlier tariff suggestions, including his idea of replacing the federal income tax with revenue from tariffs (which is, simply put, impossible), and discussed why even higher tariff rates would pose even larger risks to economic growth and world financial stability.

High tariffs also imply a massive shifting of the tax burden from richer taxpayers toward lower-income Americans. Following the method of Clausing and Lovely (2024), this PIIE Chart shows the net effects on Americans, grouped by income level, of Trump’s proposed tax cuts and tariff increases. The Chart examines an across-the-board tariff of 20%, leaving the China tariff proposal unchanged. Households in all quintiles lose net income from such high tariffs, but the losses are greatest for those at the bottom of the income distribution. The median household would expect to see its after-tax income fall by about 4.1%, more than $2,600, because of tariffs. Still, the top 1% would experience net gains in income because their losses from tariffs are more than offset by Trump’s proposed tax cuts.

This PIIE Chart is adapted from Kimberly A. Clausing and Mary E. Lovely's Policy Brief, Why Trump's tariff proposals would harm working Americans.

The United States is undergoing a “manufacturing renaissance” driven by a steady increase in investment in chip manufacturing as a result of the US Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act signed into law by President Joseph R. Biden Jr. in August 2022. Since its enactment, the United States has been on track to add more construction for computer and electronics manufacturing in 2024 alone than it did during the 20 years before the CHIPS Act.

This chart is based on the US Census Bureau’s monthly data on private sector spending on construction for manufacturing in general, as well as for construction specifically for computer, electronics, and electronical manufacturing. Investment in computer and electronics manufacturing construction began to rise in 2021 before final passage of the CHIPS and Science Act in anticipation that Congress would appropriate funding for it. Investment gained another boost in August 2022 with the enactment of the Inflation Reduction Act (IRA) and full funding of the CHIPS Act in the same month. After averaging around $6 billion per year from 2011 to 2020, investment in electronics manufacturing construction is running at over $11 billion per month, a $135 billion annual rate as of June 2024. Importantly, these figures represent realized investment by private actors responding to government incentives, not promises to invest in the future that may never be fulfilled.

Electronics manufacturing construction was as little as 3% of total manufacturing construction in 2016 and 2017 but rose to 58% as of June 2024. An 80% rise in manufacturing construction is due to the electronics category, which includes semiconductor manufacturing that the CHIPS Act subsidizes and some IRA-supported investments, such as battery manufacturing (but not electric vehicles). Yet a comparison of Census data with separate estimates of green investment suggests that only one third at most of the dramatic rise in investment the Census Bureau reports is IRA related.

Despite reports of delays and worker shortages, the strong response from private investors suggests major success for one of the Biden administration’s signature industrial policy measures, reducing reliance on a geopolitically fraught East Asia for advanced chip manufacturing. But the increase comes at a steep cost due to the government’s generous subsidies.

Some other countries are also employing industrial policy to subsidize chip production, but their chip construction spending has not risen comparably, according to a US Treasury report. South Korea was not included in the report, but its construction starts for factories declined starting in 2022, staying below the last decade’s average pace despite Korea’s addition tax incentive for investment enacted in 2023. Policymakers in Seoul are legitimately concerned about being outpaced by the United States and could spur a costly subsidies race.

This PIIE Chart is adapted from Martin Chorzempa’s blog post, “The US and Korean CHIPS Acts are spurring investment but at a high cost.”

Shortages and rising geopolitical tensions have spurred calls for the United States and the European Union to decouple—or reduce their dependence on imports—from China. All three economies are pursuing policies to diversify their import sources, with varying degrees of success: The United States has made some progress on this front, but the European Union and China have become more reliant on each other for imports since 2018.

China’s import sourcing is the most diverse of the three big regions; its concentration index, which is based on the Herfindahl-Hirschman index, is substantially lower than those of the other two. Only the European Union provides more than 10% of the total value of China’s imports. The European Union also relies on a diverse set of suppliers; just two sources—the United States and China—provided 10% or more each of the European Union’s import value in 2023. Since 2013, the European Union, however, has boosted its dependence on China for all imports.

In comparison, four trading partners each supply the United States with more than 10% of its total imports—the European Union, Canada, Mexico, and China—but US sourcing has grown more diverse since 2018, reversing the trend between 2013 and 2018.

Although the Biden administration continues to try to convince the European Union to move away from Chinese imports, the opposite is happening. The increasing divergence in US and European economic interests may make it harder for them to agree in the future on national security and technology policies involving Chinese imports.

This PIIE Chart is adapted from Mary E. Lovely and Jing Yan’s blog, “While the US and China decouple, the EU and China deepen trade dependencies.”

Egypt narrowly averted an economic crisis this year when the International Monetary Fund and others gave Cairo a financial lifeline. The latest crisis was caused by long-standing institutional and policy deficiencies, including maintaining an overvalued exchange rate, and the COVID-19 pandemic and the wars in Ukraine and Gaza.

The latest crisis is the eighth that Egypt has faced since 1952, when Egypt adopted a state-led, inward-looking economic framework. Throughout this period, Egypt’s economic performance has also been affected by political turmoil, wars, shifts in global political alignments, regional conflicts, and terms-of-trade shocks. Each episode entailed a buildup of external pressures that forced a currency devaluation.

The devaluation of the Egyptian pound in 1979 occurred when Egypt attempted to transition from socialist policies to an open-door economic policy. Reforms were slow and accompanied by rising inflation and budget deficits, and the Egyptian pound dropped in value from $2.50 to $1.40, or a 44% decrease.

Another significant drop occurred in 1989–91, when Egypt faced economic pressures from falling oil prices and declining tourism, coupled with reduced remittances and elevated public spending. In three years, the exchange rate changed from $0.90 to $0.50 to $0.30 per Egyptian pound, resulting in devaluations of 35%, 45%, and 40%, respectively.

In 2016, the Egyptian pound was devalued by 45% as a part of a number of reforms, including reduced subsidies, increased taxes, and structural reforms to enhance growth. Most recently, Egypt devalued the currency in January 2023 by 40% to $0.03 and floated it in March 2024, dropping the value to $0.02.

Despite repeated interventions and devaluations, Egypt has been reluctant to embrace a floating exchange rate system, fearing that such flexibility would fuel food price inflation and social unrest. A fixed or highly stabilized exchange rate has not served Egypt well. Egypt needs to break free from its recurring crises by undertaking major reforms and relying less on the military in its economy and foreign financial inflows.

This PIIE Chart is adapted from Ruchir Agarwal and Adnan Mazarei’s Policy Brief, Egypt’s 2023–24 Economic Crisis: Will This Time Be Different?

South Korea faces a social and economic crisis driven by a rapidly aging population. Without increased labor migration, Korea is likely to experience major losses, including income and growth declines because of its demographic challenges.

A generation ago, Korea tightly restricted immigration, but since the 2000s, the country has opened its doors to immigration. Today, Korea hosts almost a million employed noncitizen residents—just 3% of its workforce—both temporary and permanent, under visas focused on employment. Korea has only begun to tap the economic potential of foreign workers in comparison to other economies and will need to invest in more migration policies to offset its aging population.

This chart assesses the effect of zero migration on Korea's economy, assuming no additional immigration after 2024. In this scenario, aging is expected to cause a cumulative decline in Korea's income per citizen within 18 years. Other countries also have immigration challenges. For example, in the absence of immigrant workers, Spain and Italy would reach the same point three to six years later, and China and Germany would hit a similar point nearly 13 to 16 years later. By 2072, Korea is estimated to experience a 21% income loss per citizen without immigration.

A solution for Korea would be to follow the example of Malaysia or Australia and gradually increase the percentage of noncitizen workers to 15% of the workforce over the next four decades, which could reverse most of the economic growth reduction caused by aging.

Korea's experience is a harbinger of many other countries in the developing world and in many advanced countries. Korea's choices in navigating these waters will be watched by policymakers around the world.

This PIIE Chart is adapted from Michael A. Clemens's Working Paper, Migration or stagnation: Aging and economic growth in Korea today, the world tomorrow.

This is PIIE’s LinkedIn newsletter PIIE Charts, visually recapping our latest research every month. For weekly updates on new research, events, what we’re reading, and more, subscribe to our flagship newsletter PIIE Insider here.