Trump's Proposed Tariff on Chinese Imports
Although Chinese products have provided consumers cheaper options, they are hurting US domestic production and the US manufacturing base has weakened dramatically over the last few decades. Acemoglu et al. (2016) estimate that the US has lost at least two million jobs from rising Chinese imports between 1999 and 2011. To stimulate the US economy, the country is considering imposing 45 percent tariff on Chinese imports. This article argues that the higher costs associated with the said tariff on Chinese products outweigh the benefits of stimulating the US economy and may have negative impacts on the US economy as well as on the global economy. In this process, other developing countries with low wages might gain from this situation because some businesses might shift from China as the Chinese products lose their competitiveness in the US market.
The US trade deficit with China grew to USD 365.7 billion in 2015 because US exports to China were only USD 116.2 billion while imports from China hit a new record of USD 481.9 billion. The latest trade data shows that the trade volume between the US and China is worth USD 472.8 billion as of October 2016, which is 15.7 percent of the US total trade (US Census 2016).
Half of the US imports from China are electronics or machines with the largest individual categories being mobile phones, tablets and laptops. By value, China is the source of three quarters of mobiles and 93 percent of tablets or laptops shipped to the US (CNBC 2016).
The idea behind imposing tariffs is to make American companies more competitive with their foreign counterparts in the US market. But economic theory explains how the US consumers will suffer from such tariffs. With higher tariffs, Chinese products will be expensive to the US consumers and it is likely that the US consumers will end up buying fewer Chinese goods, and fewer things from anywhere else. Higher tariffs will put upward pressure on consumer prices as part of those tariffs would be passed on to consumers in the form of higher prices and downward pressure on real wages (wages adjusted for inflation) (NFAP 2016).
Higher tariffs on Chinese goods will help domestic businesses to grow and subsequently employment will grow to some extent as some inefficient domestic producers will be able to produce those Chinese substitutes at a higher cost that leads to higher prices, which is not affordable to US consumers. Thus the costs to consumers outweigh those benefits of producers due to economic inefficiency in the domestic production system.
The composition of Chinese imports to the US suggests that shrinking sales of Chinese products would hurt American businesses and workers as many goods are assembled in China with parts coming from the US. Sluggish purchases of these so-called Chinese products would also reduce the sales of their American components. A study by the Federal Reserve Bank of San Francisco found that 55 cents of every USD 1 spent by an American shopper on a "Made in China" product go to the Americans selling, transporting and marketing that product. Therefore, suppressing Chinese imports would harm American shopkeepers, truck drivers and other people involved in the value chain.
With any imposition of tariffs on Chinese imports, China would likely retaliate by blocking American goods at its borders with tariff hikes as well as squeezing the market for renowned American companies such as Apple, Boeing or General Motors doing business in China (The New York Times, 2016). For instance, in 2009, the Obama administration imposed tariffs on tires from China charging that a surge in Chinese imports was hurting American tire makers. China fired back by imposing a tax of up to 105 percent on the US chicken feet (Fox News, 2016).
Any tariff barrier on Chinese imports will have negative impacts on the US investment and productivity. According to Moody's Analytics model, higher tariffs on Chinese products will lift overall consumer price index in the US. The Federal Reserve might come up with tighter monetary policy to contain inflation. Higher interest rates will weaken consumer demands and domestic investment will go down. Moreover, any disruption to trade patterns due to said tariffs would affect complex supply chains across numerous product categories and thus increase costs of production and depress US productivity.
Chinese exports will exacerbate as the US is the largest destination (18 percent of exports) of Chinese products. It will be difficult for Chinese producers to find an alternative market such as the US. As for China, a complete halt in US goods' purchases from the country could hit China's GDP by up to 3 percent. The impact however would likely be smaller if the Chinese can manage to corner much of the market (CNBC, 2016). But managing such large scale economic fallout will be difficult for China due to the massive rise in public and private sector debt (The Conversation, 2016).
Though higher costs in China might prompt some US companies to move production back to the US, a more plausible destination would be other developing economies with lower costs such as India, Vietnam or Bangladesh. According to the Japanese survey, a factory worker on average earns USD 230 a month in India, USD 185 in Vietnam and USD 100 in Bangladesh, much lower than China (USD 463). Manufacturers in Southeast Asia would most likely step in to take the opportunity, but it will not be easy for them to ramp up production quickly.
Imposition of 45 percent tariff on Chinese products would not stimulate the US economy in the long-run as higher tariffs affect US consumption, exports, investment, employment, and productivity negatively although it seems attractive in the short-run. Potential trade war between the US and China will likely pull both countries into recession and dampen global trade. In this period of global uncertainty, developing economies with abundant labour supply and low wage rates, can gain substantially from the shift of global production system from China to other countries. Therefore, emerging countries like Bangladesh should grab any opportunity coming out from the shift of global production networks, be better prepared with necessary infrastructures and foster a better business environment to attract more foreign direct investment in comparison with its regional competitors such as India, Vietnam or Cambodia.
The writer is Fellow of Institute of Developing Economies (IDEAS), Japan, AusAID Scholar and Senior Assistant Secretary of Ministry of Public Administration, Bangladesh.