US tariffs are taxing for the whole world, not just China

The United States’ unilateral imposition of 25 per cent tariffs on Chinese products worth US$34 billion damages the global economy in the short term, and strategically threatens the economic well-being of numerous other countries.

PUBLISHED : Saturday, 14 July, 2018, 11:37pm
UPDATED : Saturday, 14 July, 2018, 11:39pm

The United States’ unilateral imposition of 25 per cent tariffs on Chinese products worth US$34 billion damages the global economy in the short term, and strategically threatens the economic well-being of numerous other countries.

International Monetary Fund managing director Christine Lagarde therefore correctly expressed her duty towards the international economic community with her recent statements. “Let us redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures,” she said.

It is, therefore, crucial to understand that unilateral tariff imposition is not merely against the interests of any one country but against the interests of all states. The most immediate threat is of disruption to a global economy which is enjoying its most sustained synchronised recovery since the international financial crisis.

“The world is currently experiencing a strong upswing that holds the promise of higher incomes and living standards. Delivering on this promise is critical,” Lagarde said. “But we can see darker clouds looming ... the momentum expected for 2018 and 2019 will eventually slow.”

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To avoid those darker clouds, she had a clear message – that governments need to steer clear of protectionism in all its forms.

The threat posed by unilateral tariffs was reflected on US financial markets themselves. Just the threat of tariffs led to hundreds of billions of dollar losses for investors – even before damaging tariffs were imposed.

It is an error to believe the negative consequences of US tariffs on China would only affect those countries. The modern globalised economy’s efficiency is based on international value chains spanning many countries, while markets must be international to support large-scale, efficient production.

An example is the threat to Germany from proposed US actions. As the Financial Times noted: “German companies fear they could suffer considerable collateral damage … because machines and cars made by their subsidiaries in China and exported to the US could end up being hit just as hard as all-Chinese products.”

The head of the German Machinery Association’s foreign trade department stressed he was receiving anxious calls from companies worried about the tariff’s impact.

But even greater than the immediate damage to the world economy is the strategic threat. By definition, international trade is multinational, and must, therefore, have mutually agreed rules.

If any one country is allowed to set the rules, or to act outside a mutually agreed framework, it would inevitably manipulate the situation to its own advantage. Any US action outside the World Trade Organisation therefore strategically threatens the multilateral trade framework on which every economy’s prosperity depends.

This is even more serious when the US administration has a wrong analysis of the causes of its trade deficit. Again, as Lagarde put it on trade deficits, “imbalance is driven by the fact that a country spends above its income”.

The US trade deficit is “Made in the USA” by spending more than its income. While the US tariffs will damage the global economy, they will not reduce the US trade deficit – as numerous Western commentators have pointed out.

US-China trade war: winner will be whoever can lose the most

The slower growth imposed on other countries by US actions would also inevitably lead to increased social and political tensions within them.

In his speech to this year’s Boao Forum, China’s President Xi Jinping repeated an unequivocal defence of globalisation. “Over the last four decades, the Chinese people have embraced the world with open arms and actively contributed our share to the world,” he said.

Xi added that globalisation was not only in China’s interest but that of all countries. Events since the US threat of unilateral tariffs strongly confirm that judgment.

John Ross is a senior fellow of the Chongyang Institute for Financial Studies at Renmin University of China