The Tarif Deals

On July 6, U.S. President Donald Trump’s administration officially instituted 25% duties (average U.S. tariff is under 4%, according to the WTO) on $34 billion worth of Chinese goods. Trump also placed tariffs on over 10,000 products from China, the European Union, Canada, and other locations (applied to under 4% of goods). In response, several trade partners have placed tariffs of their own on American goods. Trump’s tariffs have caused other countries to respond in a way that harms American workers — especially in the agricultural sector. Farmers are saying that the tariffs have slashed their profits and livelihoods, since many of their products are exported to countries which have instituted tariffs in response to those levied by Trump.

Tarif Effects on China

The trade war with the U.S. couldn’t have come at a worse timing for China, which had just begun focusing on fixing its credit problems with its economy. China faces a policy dilemma in that Beijing is seeking to implement relatively tight monetary policy to force financial deleveraging, but it also needs easier monetary conditions to support growth.

The depreciation of the yuan would offset the loss in export competitiveness for Chinese exporters due to higher tariffs, meaning that Chinese goods will essentially be cheaper to Americans. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. Historically, when credit growth has risen more than warranted it has fueled concerns over financial stability and that has seeped into depreciation pressures on the currency.

With the limitations of monetary policy, another option is to implement fiscal policy, such as the value-added tax credit rate to exporters in China which would raise their income by between 3.5% and 4%. China, in the short-term should use these fiscal policy measures; lessening the burden on monetary policy will also lighten the pressures on the currency.

Tarif Effects on the US

Trump’s statements that tariffs would be good for US consumers and businesses are simply false. There are hundreds of thousands of jobs could be lost if the recent trade war with China were to continue.

When it comes to trade, nothing happens in isolation, there are downstream effects to tariffs.

Steel and aluminum tariffs can help American workers in these industries, with a June 2018 report revealing that the steel and aluminum industries could gain over 26,000 jobs. However, this same report indicated that, across all other industries, the tariffs could result in a loss of over 400,000 jobs. For example, a Missouri-based nail factory saw the price of its raw material for making nails, steel, readily increase following Trump’s tariffs. As a result, the company’s sales diminished by half and the company laid off over 100 employees.

Measured by estimates of private consumer expenditure, Asia today is just about as big as the U.S. The big difference is that private consumer expenditure in Asia is growing at twice the speed compared with the U.S. If Japan is excluded, Asia’s growth is 3X faster. If the current growth rates of imports respectively in the U.S. and China hold in the next few years, by 2021 China will surpass the U.S. to become the largest market for imports in the world.

Tarif Effects on the EU

From a simple perspective of market size, Asia today is far more important to the EU than the U.S., and the EU will soon be more important to Asia than the U.S.

Trump’s trade war is creating new impetus for the EU and Asia to speed up the opening of their markets to forge closer economic ties. This will lead to even faster growth than in the last decade in trade between the EU and Asia, accompanied by rising investment. Virtually everywhere outside of the U.S., a new sense of urgency is now afoot as policy makers seek to fast track regional free trade agreements. For instance, after Trump pulled out of the Trans-Pacific Partnership, a successor, renamed as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, was signed in March this year by 11 countries on both sides of the Pacific.

A direct consequence of the Trump trade war, therefore, is faster and wider economic integration outside of the U.S., accelerating the shift of global economic center of gravity toward Asia.

A final irony, in waging his trade war, Trump has gifted China with the strategic opportunity to champion economic liberalization and free trade; giving President Xi Jinping a big helping hand to make China great again. #MCGA

Disclaimer: #MCGA has absolutely nothing to do with anti-Americanism; only to point out how poorly the US is handling global trade.