Thoughts on the proposed US tariffs

Trade between China and the US seem to be in difficulty as the US President has proposed tariffs on $50 billion of Chinese exports to the US with the threat of tariffs on another $100 billion of Chinese exports. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 It has rattled the stock market and may lead to a possible trade war between the two largest economies in the world that may have both economic and non-economic effects on the US. This article will explore only the economic effects. Also, the proposed tariffs may have indirect effects on Canada’s international trade.

In 2017, the US had $5.2 trillion of international trade and ran a deficit of more than $560 billion. https://www.thebalance.com/u-s-imports-and-exports-components-and-statistics-3306270

The US imported $506 billion worth of Chinese goods and services (which is 20 percent of total Chinese exports) while it exported $130 billion worth of goods and services to China. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 The large trade deficit must have played a role in the proposition of tariffs.

Rapid growth in imports from China has allowed US consumers to benefit from low-priced consumer goods. However, these increased Chinese imports led to the destruction of US manufacturing that could not compete with low-cost imports. This contributed to increased US unemployment, which are often concentrated in specific industries and geographical locations. Also, not all the unemployed workers could necessarily get employment in alternative industries. It is estimated that between 1999 and 2011, Chinese imports contributed to unemployment of 2.4 million workers. https://www.ddorn.net/papers/Autor-Dorn-Hanson-ChinaShock.pdf Again, research has shown that increased competition led to reduction in innovation and new patent creation in the US. As 70 percent of research & development expenditure and patenting activity in the US is in manufacturing, it can be harmful for the country. https://www.vox.com/new-money/2017/3/29/15035498/autor-trump-china-trade-election  http://economics.mit.edu/files/11708.

Research has shown that Chinese companies benefit the most when they form joint ventures with US companies. https://blogs.wsj.com/economics/2018/04/12/study-shows-big-benefits-to-chinese-companies-from-joint-ventures-with-u-s-firms/ However, theft of technology, lack of intellectual property rights and coercion to transfer technology has prompted concerns by the US government. http://money.cnn.com/2018/04/05/news/trump-tariff-china-trade-war/index.html While it is very attractive to access the large Chinese market, when foreign companies manufacture and operate in China, they are forced to transfer technology to the country. As these companies invest significant time and money to develop technology, this is a loss for them. Also, foreign companies operating in China have to store data in China and allow the Chinese government to access it, which again leads to tech know-how moving from the US to China. https://www.wsj.com/video/three-ways-china-gets-its-hands-on-us-tech/18ED2367-40D3-4FBE-979B-83B08452B9A9.html

Tariffs for China and the US are quite disproportional. The tariffs that China imposes are quite high compared to the US. While the US imposes 2.5 percent tariffs on imported cars, China’s tariffs on imported cars is ten times at 25 percent. https://www.bloomberg.com/news/articles/2018-04-06/trump-trade-talk-earns-grudging-support-at-elite-lake-como-event This indicates that China needs to play its part in making trade fairer.

While there are compelling reasons for US concerns and the proposed tariffs, not bringing the trade dispute before WTO but trying to solve it bilaterally may set a bad precedence that is harmful for global trade. https://asia.nikkei.com/Economy/Trade-tensions/Trump-trade-policy-a-very-dangerous-precedent-says-Stiglitz The proposed tariffs will make the affected Chinese imports more expensive to US consumers, which will decrease the purchasing power of the US consumers. This will particularly impact low-income US consumers who are sometimes already struggling to make ends meet.

When Chinese imports become pricier in the US due to the proposed US tariffs, Canadian exports to the US will become relatively cheaper. The relatively cheaper Canadian goods and services may make them more appealing to US consumers which may prompt them to purchase more Canadian exports. Therefore, an indirect effect of the proposed US tariffs may be increased Canadian exports to the US, which will be beneficial for Canadian exporters, workers and the Canadian economy.

The proposed US tariffs may have repercussions like China’s threat of tariffs on $50 billion of US goods. China is the third largest and rapidly growing export market for the US. https://www.bloomberg.com/view/articles/2018-04-06/trump-s-tariffs-overlook-how-much-u-s-needs-china The proposed Chinese tariffs will adversely impact US agriculture including its farmers and winemakers. According to the Brookings Institution, it may affect 2.1 million US jobs. https://www.washingtonpost.com/news/wonk/wp/2018/04/05/china-has-more-to-lose-in-a-trade-war-but-trump-has-a-key-weakness/?utm_term=.8ca66da3b8e7 Therefore, the effect of the proposed Chinese tariffs on US employment is quite considerable. Also, the trade dispute could escalate and with China holding $1.3 trillion of US Treasury securities, sale of treasury securities by China will be deleterious for the US economy. Reduced Chinese interest to purchase US Treasury securities in the future will also be harmful for the US economy.

A full-scale trade war between the two largest economies in the world will have serious repercussions for global trade, including for the US economy. It may have ripple effects that can adversely affect trade-dependent countries like Canada. However, there are some signs that the trade dispute may be improving. The Chinese premier suggested proposals to increase imports, relax foreign-ownership rules for manufacturing and improve protection of intellectual property rights. https://www.bloomberg.com/news/articles/2018-04-09/xi-set-for-landmark-economic-speech-as-trump-trade-fight-simmers If these proposals are implemented, the trade dispute between the two countries may improve.

The US needs to improve its trade deficit as running large trade deficits for a long time may not be necessarily healthy for the economy. It has low domestic savings. In order to consumer more, it has to borrow from other countries. https://www.bloomberg.com/view/articles/2018-04-06/trump-s-tariffs-overlook-how-much-u-s-needs-china Therefore, policies to improve domestic savings will be helpful in reducing the need to borrow from abroad. Also, support for import-substituting and employment-generating industries can help to reduce the large trade deficit as well as improve the economy, generate employment and help the adversely affected middle-class and low-income workers. Again, increased collaboration with historical trading partners like Canada in terms of deep manufacturing and trade integration and collaboration may also help in augmenting the economy.

Concessions from China like increased market access, protection of intellectual property rights, stopping forced transfer of technology and data to joint-venture companies or the country, and relaxing foreign-ownership rules will help to improve the trade dispute. Also, issues like Chinese companies receiving state support and financing which allow them unfair advantages need to be addressed. While Canada may temporarily benefit from a trade dispute between the US and China, it will be adversely affected in the long run due to the shock global trade will suffer resulting from a trade dispute or trade war between them.

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