The unwinnable trade war

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Engr Omar Shahkar

IN late June, the leaders of China and the United States announced at the G-20 meeting in Osaka, Japan, that they had reached a détente in their trade war. Washington put on hold new tariffs on Chinese goods and lifted restrictions preventing US companies from selling to Huawei, the blacklisted Chinese telecommunications giant. In September, after a summer of heated rhetoric, the Trump Administration increased tariffs on another $125 billion worth of Chinese imports. China responded by issuing tariffs on an additional $75 billion worth of U.S. goods. The United States might institute further tariffs in December, bringing the total value of Chinese goods subject to punitive tariffs to over half a trillion dollars, covering almost all Chinese imports.
China’s retaliation is expected to cover 69 % of its imports from the United States. If all the threatened hikes are put in place, the average tariff rate on U.S. imports of Chinese goods will be about 24 %, up from about three % two years ago, and that on Chinese imports of U.S. goods will be at nearly 26 %, compared with China’s average tariff rate of 6.7 % for all other countries. The numbers suggest that Washington is not winning this trade war. Although China’s economic growth has slowed, the tariffs have hit U.S. consumers harder than their Chinese counterparts. With fears of a recession around the corner, Trump must reckon with the fact that his current approach is imperiling the U.S. economy. The trade war has not produced the desired results for the United States.
Washington first raised tariffs on Chinese imports in 2018. In the same year, Chinese exports to the United States increased by $34 billion, or seven %, year-over-year, while U.S. exports to China decreased by $10 billion, or eight %. In the first eight months of this year, China’s exports to the United States dropped by just under four % compared with the same period in the previous year, but U.S. exports to China shrank much more, by nearly 24 %. Instead of narrowing the trade gap, the tariffs have coincided with a widening of the US trade deficit with China: by nearly 12 % in 2018 (to $420 billion) and by about another eight % in the first eight months of this year.
There are at least two reasons why Chinese exports to the United States have not fallen as much as the Trump administration hoped they would. One is that there are no good substitutes for many of the products the United States imports from China, such as iPhones and consumer drones, so U.S. buyers are forced to absorb the tariffs in the form of higher prices. The other reason is that despite recent headlines, much of the manufacturing of US-bound goods isn’t leaving China anytime soon, since many companies depend on supply chains that exist only there. (In 2012, Apple attempted to move manufacturing of its high-end Mac Pro computer from China to Texas, but the difficulty of sourcing the tiny screws that hold it together prevented the relocation.)Some export-oriented manufacturing is leaving China, but not for the United States.
60 % of US companies said they would stay in China and about 6% are heading back home. The damage to the economy on the import side is even more pronounced for the United States than it is for China. In 2018, the tariffs did not compel Chinese exporters to reduce their prices; instead, the full cost of the tariffs hit American consumers. As tariffs raise the prices of goods imported from China, US consumers will opt to buy substitutes (when available) from other countries, which may be more expensive than the original Chinese imports but are cheaper than those same goods after the tariffs. The price difference between the pre-tariff Chinese imports and these third-country substitutes constitutes what economists call a “dead-weight loss” to the economy. Meanwhile, Chinese consumers aren’t paying higher prices for U.S. imports.
A study by the Peterson Institute for International Economics shows that since the beginning of 2018, China has raised the average tariff rate on U.S. imports from 8.0 % to 21.8 % and has lowered the average tariff rate on all its other trading partners from 8.0 % to 6.7 %. Trump may back away from his self-destructive policy toward China, but US-Chinese competition will continue beyond his tenure as President. This trade war is bleeding the world economy. What will be the future of the world economy? Only time will answer this question.