Effects of Trade Wars on Consumer Confidence

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The Effects of 21st Century Trade Wars on the U.S. Consumer Sentiment Index

RESEARCH QUESTION

Being the world’s largest economic power, the U.S. has engaged in multiple trade wars throughout history. But what are trade wars and why do countries wage them? A trade war refers to two or more nations creating trade barriers, such as tariffs, state subsidies, or import quotas, on each other to restrict international trade. The crux of any trade war is the belief that changes in trade arrangements can have huge impacts on domestic economies, on labor markets, and on social well-being (Torres-Coronas, 2009). The research question focuses on the effects of 21st century trade wars on the U.S. Consumer Sentiment Index (CSI). This research will determine whether there is a correlation between the effects of trade wars and consumer confidence; such a relationship, if discovered, will show whether the recent trade wars help or hurt the economy and average American consumers.

INDEPENDENT VARIABLES

This paper will analyze two major 21 century trade wars, which are the 2002 Bush Steel Tariff and the 2009 Obama Tire Tariff. The researcher selected these two wars because both were waged against the world’s second largest economy, China. In order to see the effects of the trade wars, the researcher will also study the time when the U.S. did not have any trade war, the first two years of president Obama’s second term. The researcher believes that it is necessary to look at economic indicators when one tries to understand the effects that the trade wars have on the economy. The best economic indicators are unemployment and inflation rates because they best capture the overall health of the U.S. economy. Unemployment is the monthly average level of unemployment in the US workforce and inflation is the monthly change in the US consumer price index (James P. Todhunter, 2012). There are three independent variables: the presence or absence of a trade war, unemployment rate, and inflation rate.

DEPENDENT VARIABLE

Consumer confidence ratings are useful measures of the effectiveness of certain monetary policies (the Balance, 2018); they also influence how American policymakers and leaders determine their next actions (Argyle et al, 2016).

University of Michigan Consumer Sentiment Index is the dependent variable. One can use the index to observe whether average American consumers felt the effects of the wars. The scores are generated through consumers’ opinions, not aggregate economic data such as unemployment and inflation rates. The method to obtain the data is done through a monthly phone survey that “contains approximately 50 core questions, each of which tracks a different aspect of consumer attitudes and expectations. The samples for the Surveys of Consumers are statistically designed to be representative of all American households” (Surveys of Consumers, University of Michigan, 2018).

The researcher selected the index because, unlike other indices that charge hefty fees to access their data and only have information available for lesser than 50 years, this index is free to access, is easy to read and contains data going back 50 years. The researcher chose the dependent variable by reading previous research.

HYPOTHESES, VARIABLE RELATIONSHIPS AND POPULATION

Hypothesis 1: positive effects of trade wars (low unemployment and inflation rates)
increase consumers’ confidence in the economy

Hypothesis 2: negative effects of trade wars (high unemployment and inflation rates) decrease consumers’ confidence in the economy

The monthly unemployment and inflation rates serve as indicators to gauge the effects of the trade wars on the U.S. economy, and subsequently those numbers from the indicators should affect the consumer  sentiment index. The researcher expects such relationship because if the trade wars truly do  wonder to the economy, consumers should be able to experience the positive effects of a better economy and they should be willing to spend more money. The population that the researcher is interested in investigating is the American consumers.

POTENTIAL RESEARCH DESIGN, MEASUREMENT, AND METHODOLOGY

The researcher plans to investigate the research question by conducting a case study, especially given this paper’s focus on the two recent spats. The goals are 1) to measure the overall trade war effects on the economy in terms of the increase or decrease in unemployment and inflation rates 2) whether those effects influence consumer confidence, and 3) to see which war hurts the consumers the most by comparing CSI percentages.

 The researcher plans to use a nominal measure when she gathers the monthly unemployment and monthly inflation rates from the U.S. Department of Labor and monthly University of Michigan’s Consumer Index Sentiment.

There are three windows that the researcher uses to study the effects of the trade wars. The first window that focuses on Bush Tariff starts in the fourth quarter of 2001 (2001Q4) and ends in the second quarter of 2004 (2004Q4). The second window that studies Obama Tire Tariff starts in the first quarter of 2007 (2007Q1) and ends in the third quarter of 2011 (2011Q3); this window enables one to observe trends both before and after the safeguard tariffs took effect on September 26, 2009. (Gary Clyde Hufbauer and Sean Lowry, 2012). The last window illustrates the absence of a trade war during the the first two years of president Obama’s second term, which starts in the first quarter of 2003 (2013Q1) and ends in the first quarter of 2005 (2015Q1).

One of these three windows was selected from a prior study by Gary Clyde Hufbauer and Sean Lowry. The researcher determined the appropriate time frame for the other windows by reading other research and deciding the periods. The researcher will test both of the hypotheses by looking at the change in unemployment, inflation rates and CSI for the three windows. Lastly, the researcher will compare the three windows to see which one lowers the CSI the most.

LIMITATIONS

Studying the effects of the trade wars on the economy involves many different variables.

The windows, unemployment, inflation rates, and CSI have been carefully selected to best measure the effects of the wars. However, one cannot be 100% certain that the trade wars are the sole factor for unemployment rate, inflation rate, and CSI to fluctuate. For example, there can be other factors that affected CSI such as the housing crisis in 2008.

Another limitation is that the University of Michigan’s CSl does not ask every American consumer about their economic sentiment. It generalizes about the entire U.S. population based on a sample.

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