Trump's new China tariffs

But who would pay for the tariff hike?

Muhammad Mahmood   | Published: May 25, 2019 21:40:05 | Updated: May 26, 2019 21:23:33

Trade negotiations held between the US and China a couple of  weeks ago  in Washington broke up within a day (10 May 10) without any agreement in the wake of Trump jacking up  tariffs from 10 per cent to 25 per cent on Chinese goods worth US$200 billion. The core issue that led to the break-up of trade negotiations was the US refusal to lift tariffs even after a deal was signed. President Donald Trump tweeted that the process had begun to place additional tariffs at 25 per cent on the remaining US$325 billion worth of Chinese goods. Once the proposed tariffs take effect, that will practically cover everything that come to USA from China.

But Beijing tried to reassure that the negotiations had not completely broken down. Liu He, Chinese Vice-Premier, said talks would continue, but gave no details. He, however, reiterated China would not back down on "issues of principle'' and voiced measured optimism that a deal could still be struck. Trump also said that while the US would continue to negotiate, there was no rush. But US Treasury Secretary Steve Mnuchin said no further talks with China were planned as of now. Larry Kudlow, Trump's Economic Adviser, however, indicated that China had extended invitation to US Trade Representative (USTR) Robert Lighthizer and Treasury Secretary Steve Mnuchin to visit Beijing for further talks. He further hinted that there was a strong possibility Trump would meet President Xi Jinping at the G20 meeting in Japan next month. These are more directed to reassure the market expectation of  successfully negotiating a deal and keep the market calm. But it is now getting clear that even if a trade deal is reached, the wider US-China conflict will remain unresolved. The battle will continue.

The US on May 11 scaled up tariffs on from 10 per cent to 25 per cent on US$ 200 billion worth of Chinese goods. Trump has asked USTR Robert Lighthizer to make arrangements to begin imposing tariffs on remaining US$300 billion worth of imports from China but no final decision has yet been taken on that. Beijing in retaliation has taxed US$101 billion US farm products in a calculated bid to inflict pain on Trump supporters in the farm belt.

It now appears both sides are stiffening their position and have almost reached a deadlock. The US is still continuing with its efforts to make China bring changes to its laws to better serve US business interests but Beijing has strongly responded that it would not compromise on its core interests.

Many within China now consider such US behaviour is reminiscent of Japan's demands for extra-territorial rights and other concession in the early 20th century. But this time around the US is facing a very different China. It is extremely unlikely the US demands will be heeded to simply because it would be in direct violation of China's sovereignty. Vice Premier Liu made that amply clear when he said "We absolutely cannot make concessions on such issues of principle. We hope our US colleagues understand that''. The People's Daily on Monday (May 13) wrote "At no time will China forfeit the country's respect, and no one should expect China to swallow bitter fruit that harms its core interests". The paper further added that China was open to talks but would not yield to important issues of principles.

Meanwhile, Trump threatened Beijing to act now to conclude an agreement with the US or else it would be far worse for China if this be negotiated in his second term in office, of which he seems to be feeling quite sanguine. He has practically disrupted trade around the world. His threats against China to conclude a deal soon will eventually end up in tariffs. He firmly believes he is in an advantageous position in negotiating with China or for that matter, with his neighbours, the EU and Japan.

Trump thinks he is in the right position with China now and claims that the US would take in "tens of billions of dollars from China''. What basically he is claiming is that Chinese are paying the tariffs to the US and will continue to do so. But his Economic Adviser Larry Kudlow contradicted him in a TV interview and said "both sides will suffer from this''.

As further tariff hike on Chinese goods  starts to take effect, it will negatively impact on both the Chinese and US economies simply  because no trade war is winnable despite Trump's rhetoric that "trade wars are good and easy to win''. But Trump's claim that the Chinese would be paying the tariffs to the US in clearly a misstatement. By any reckoning, increased revenue from tariffs will come from duties paid by US importers who then will pass that on to consumers, but not from Chinese exporters. In other words, US consumers are going to foot the bill for the Trump tariffs. It is estimated that tariffs on all Chinese goods would cost US households about US$2000 a year in higher prices.

So far Chinese exporters have not reduced the price of their products to stay competitive in the face of the tariffs. US importers have also not absorbed the increased cost of the tariffs. So it is the US consumers who are now dishing out the increased cost of the tariffs. Recent studies carried in the US demonstrate that when grouped together, the major imported consumer goods affected by the tariffs show that prices of these consumer goods increased much more than other goods included in the Consumer Price Index (CPI) basket for the calculation of the rate of inflation. While this is the short-run phenomenon, the long-run price adjustment may take quite some time to workout  Meanwhile, on May 13  China  imposed retaliatory tariffs by hiking up the rate as much as to 25 per cent  on US goods worth  US$60  billion. The new Chinese tariffs would take effect from June 01. This would also cause ripple effects on the US economy. Many studies have shown that the tariffs imposed by the US on Chinese goods and the retaliatory tariffs by China have already caused price increases and supply shortages.

It is estimated that Trump's tariffs on Chinese goods would generate US$30 billion a year but that would also cause a decline in GDP (gross domestic product) by the same amount. Further tariff hikes will further contribute to that decline.  In effect consumer welfare loss could be much higher than the amount of revenue generated by the tariffs. Increased price of imported goods also incorporate price hikes from supply shortages and reduced consumer spending, resulting in deadweight loss which causes economic inefficiency. China is not the only game Trump is playing, he has imposed tariffs on other countries as well. But much of the price increases are attributed to Trump's tariffs on Chinese goods. While US consumers are picking up the tab on consumer goods such as clothing, shoes, toys, electronics and others resulting from the tariffs, Trump's base appears to be sticking by him on his China policy and they think that trade war with China is good for their country. Obviously, that has encouraged Trump to further confront China on the economic front as he is vying for the second term.

Trump is not unique among US presidents in using trade policy to protect politically sensitive and also politically connected industries but the efficacy of such actions in winning an election is very difficult to predict given that there is the time lag involved in the decisions affecting the hip-pocket and the election.

Muhammad Mahmood is an independent economic and political analyst.




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