The trade war between China and the United States has intensified in recent days, with both countries announcing new tariffs on the other’s products.
Quoting Jim Glassman, Head Economist, Commercial Banking, May 15, 2019:
“Trade negotiations with China stalled on Friday, leading the Trump administration to impose a 25 percent tariff on approximately $200 billion of imported Chinese merchandise. The broad tariff appeared to rattle financial markets earlier this week; investors may be anxious about global supply chains, and many fear retaliatory measures that could curtail US access to the Chinese market.
The bigger picture, however, tells a more reassuring story. America’s trade deficit is hardly the crisis it’s made out to be, and its real issues with China are resolvable. Ultimately, global commerce offers too many benefits for trade relationships to be rolled back—Asia’s developing economies run massive trade imbalances today, but their growth is creating expansive new markets for US exports.”
US President Donald Trump has repeatedly said that China will pay for the new tariffs that have been imposed on their exports. However, his economic advisor, Larry Kudlow, recently admitted that it will actually be American importers that pay the tariffs on products that are brought into the country from China. This state of affairs leads some analysts to state that the cost of the trade war between China and the United States will ultimately be borne by US consumers.
Another view was expressed by Jim Glassman; ” In the real world, however, tariffs don’t always translate directly into higher retail prices. For example, when the Trump administration placed some $35 billion in tariffs on Chinese goods last summer, the People’s Bank of China responded by devaluing the yuan by 10 percent against the US dollar. The falling exchange rate more than offset the tariffs’ effect on retail prices, and Chinese imports remained affordable for American consumers.”
Impact of the trade war on China
China remains the largest US trading partner, with an increase in exports of 7% last year. However, trade flows between the two countries have fallen by 9% during the first quarter of 2019. This suggests that the effects of the trade war between the US and China are beginning to materialize. Despite this, there is no evidence that Chinese companies are lowering their prices in order to maintain their US customers. Some exporters of highly substitutable products have left the US market because American companies have begun to import them from elsewhere. Margins on these Chinese products tend to be small and tariffs are clearly damaging. On the other hand, companies that sell highly differentiated products have not reduced their prices. This is a possibility because US importers are too dependent upon them.
Impact of the trade war on the United States
According to two academic studies that were published this past March, American businesses and consumers paid nearly the total cost of US trade tariffs imposed on Chinese products during the last year. Economists working together at the Federal Reserve Bank of New York, Princeton University, and Columbia University calculated that increased rates levied on a wide range of products, from steel to washing machines, cost US businesses and consumers an additional US $3 billion per month. This report also identified another US $1.4 billion in losses related to a decline in demand.
Ultimately, the rewards of globalization vastly outweigh its disruptions. China’s rise dislocated some sectors of the US economy as low-cost imports began to compete with domestic products on store shelves. But China is on track to become the world’s largest consumer market, and it’s already an important destination for high-end US exports. The US-China economic relationship is too important—and has the potential to generate too much wealth—to be sacrificed for short-term protectionism.
Can American companies buy their products in other countries?
President Donald Trump has urged companies that import goods from China look elsewhere for sources of needed products. He has also suggested that a better than foreign option would be to buy items from US manufacturers. Doing this, however, is most often not a simple proposition. It often takes a long time to reorient productivity and value chains. Doing this comes at a cost, which is, most often, ultimately borne by the US consumer. For example, there is time and expense involved in ramping up production of US steel to take the place of that imported from outside of the country. Also, because China is an industrial powerhouse that dwarfs its closest rivals, it is difficult to replace Chinese firms in global supply chains.
Are tariffs effective?
Some point to the success of President Ronald Reagan’s decision to impose a high rate of tariffs on Japanese motorcycles in 1983 as an example of the potential effectiveness of the strategic use of duties on imported products. It is often noted that this decision was critical to protecting Harley Davidson from a wave of foreign competition that ensured its survival. Some argue, however, that it was through the company’s own efforts that included the modernization of its factories and the construction of better engines that reversed the company’s fortunes.
Will the Chinese be forced to negotiate a deal to end the trade war between the US and China?
There is a consensus among foreign trade experts that tariffs imposed by the Trump administration will succeed in bringing China to the negotiating table. There is also the additional belief that the Asian giant will not offer radical concessions to the US to end the dispute. Although they are experiencing a greater slowdown in growth and export more to the United States than vice versa, trade watchers believe that the Chinese are really not interested in significantly changing their laws. They also note that the country does not have the legal culture to enforce changes should they, in fact, be made. At present, the two countries appear to be in a stalemate. Only time will tell whether the US or China will be the first to blink.