The US and China beware: trade war tariffs are a double-edged sword
- Recent rhetoric over the punitive duties suggests they have become the main stumbling block in trade negotiations between Beijing and Washington
- But while the US holds the upper hand for now, it should know from its history that a double-edged sword has global ramifications
Tariffs have historically been a tool for governments to collect revenue, but they are also used as a weapon to protect domestic industries and production in a trade war.
At issue, however, is who pays for such tariffs. Trump, the self-styled “Tariff Man”, believes they work not only as leverage over an opponent in negotiations, but also raise revenue for state coffers. He repeatedly asserts that “China is paying for it”.
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But tariffs are not paid by either the Chinese or American governments – they are paid directly by importing companies in both countries. US tariffs are paid by US-based companies to American customs for the goods they import from China. The additional costs would be borne by one or all three parties involved in the process: manufacturers, importers and consumers.
On the surface, both governments are net winners as they receive more revenue from the additional duties. Given that the US imports much more than China, Washington can pocket more than Beijing through the mutual imposition of punitive tariffs.
The US has slapped tariffs on US$550 billion worth of Chinese products. China, in turn, lashed back at US$185 billion worth of American products, with the total of both figures equivalent to about the entire trade volume between the two countries. In 2017, the year before the trade war, US imports from China were worth US$505.47 billion, while China imported US$129.89 billion of American goods, according to US figures. Washington has also imposed a much higher rate of tariff than Beijing’s reciprocal levies.
Trump believes trade wars are designed to protect American interests and provide advantages to its domestic businesses. In practice, however, it is rare that any one party can win in such mutually destructive wars, which would ultimately hurt companies and consumers, importers and exporters, as well as wholesalers and retailers – though the damage to each victim might vary in degree.
Trump is obviously wrong to suggest only China pays all US tariffs. In practice, tariffs are split between lower profit margins for wholesale importers, retailers, and manufacturers, and higher prices for consumers.
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For example, American companies essentially have three options to deal with rising costs from the additional levies. They can absorb the extra expense by decreasing their own profit; increase retail prices to transfer the additional cost to consumers; or shift their suppliers from China to other countries which manufacture similar products and substitutes.
Beijing’s insistence that all tariffs be rolled back as part of the “phase one” deal, and Washington’s disagreement in this regard, clearly suggests the US has the upper hand in this fight. Obviously China would suffer much more than the US in this war in terms of declining GDP growth due to higher prices for imported goods and lower prices for exported goods.
China’s worst nightmare is that US importers’ shifting of suppliers from China to other countries would trigger an exodus of industries from the world’s manufacturing hub. Under such conditions, Beijing should make substantive concessions to warrant Washington’s agreement to remove the tariffs.
Trump has the motivation to keep the tariff war in the headlines in the run-up to the 2020 US elections, but while doing so could have benefits for the president, it could also hurt his constituencies.
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However, higher government revenue from the tariffs and gains for local manufacturers would not fully offset the total income loss in a trade war – not to mention the conflict’s indirect effects, including rising investment and consumption uncertainty and elevated market volatility that would affect the overall business environment and thus drag on growth.
For instance, the cost advantage of Chinese imports helped many US companies to run profitably. Tariffs can make domestic industries less efficient and innovative by reducing competition, while this reduction – coupled with rising prices – also hurts local consumers. They can also distort market competition by favouring certain industries, or geographic regions, over others.
America’s import-oriented manufacturing and export-oriented agricultural sectors have all been hurt by rising costs from the tariff hikes imposed by both governments. Trump has, in collaboration with Congress, had to give them aid in the form of economic subsidies to ease their losses.
In a globalised economy, the contagion of a trade war can undoubtedly grow to affect many aspects of the American and Chinese economies, in ways that are hard to measure quantitatively. Likewise, their trade war can also expand to affect other countries not initially involved in the fight.
It was then US President Franklin D. Roosevelt’s pro-trade policy and the enactment of the Reciprocal Trade Agreements Act in 1934, which helped reduce tariffs and remove barriers, that revived global trade.
Obviously, the tussle over tariffs has become the last innings of the marathon negotiation between the world’s main economic rivals – even though they are a double-edged sword, just as likely to injure the wielder while killing the opponent.
Moreover, any attempts to further hike punitive tariffs would devolve into a mutually destructive cycle of retaliation, and eventually drag the US and China into a full-blown trade war. Such a scenario would lead to the decoupling of the world’s two largest economies and a disruptive shake-up of the global supply chain, which would create a long-term threat not only to global prosperity, but also to world peace. ■
Cary Huang is a veteran China affairs columnist, having written on the topic since the early 1990s