The issue with Trump’s tariffs are that China may not be as affected by them as initially thought. China is the largest exporter in the world but more importantly the largest re-exporter. Many international companies build and manufacture their products in China and they will be the ones carrying the cost of the tariffs. As it is unlikely that the companies will absorb the tariff costs, they will most likely be passed on to the consumers, who are the true victims of this trade war. For example, if an American company manufactures a product in China using any of the tariffed products, American consumers who buy this product will end up covering the cost of the tariff rather than the American company or the Chinese manufacturer/assembler. The Buick Envision is an example of a product that is hit by the 25% US tariff and could cost $8,000 more. Although they are explicitly left out of the tariffs for the moment, Apple products could also be affected, including iPhones, which are assembled in China but have a huge US demand. It is unclear whether Trump will place tariffs on iPhones, however the larger fear for Apple is the retaliation from China’s government, who could make selling Apple products in China more difficult to promote domestic brands. There are very few Chinese products which are produced and manufactured in China that American consumers want. None of these products have as much of a demand as American products, produced and manufactured in China that American consumers want. It shows how American consumers and companies are drastically more affected by the tariffs rather than the intended Chinese consumers and companies.
This could be an advantage for the American economy as consumers will be less willing to pay a higher price for goods produced in China and will try to find cheaper alternatives, most likely American goods. This will help boost America’s GDP, however it could lead to a monopoly in the US for the markets affected by tariffs. Then it will be up to these American companies to choose the price of their product, which they are likely to increase to increase their own profits, leaving consumers to pay a higher price for the product.
One of the reasons Trump imposed tariffs on steel and aluminium specifically is because he wanted to save/create US jobs in these industries. Logically, this would make sense as American consumers look for cheaper alternatives in the US, demand increases in the US and hence more jobs can be created to reach this demand. Unfortunately for the Trump administration, it is unlikely that he will be saving jobs but rather losing jobs. Jobs will be created in the steel and aluminium industry although they will be lost in other industries such as in agriculture. China has imposed tariffs on US sorghum and soybeans, with soybean imports accounting for 60% of the US’s total agricultural exports to China. This will lead to Chinese consumers looking for alternative suppliers or products resulting in less demand for American soybeans. With less demand, it will lead to jobs being cut as companies can’t afford to keep all of its staff.
Although GDP may increase in the US from the tariffs, this will likely be offset by the reduced investment into the US. The unexpected nature of the tariffs has shown investors how volatile and potentially unstable the US is. Companies who may have been thinking of expanding into the US will probably wait or reconsider, as they do not want to unexpectedly be the victim of another tariff imposed by the Trump administration. With investment decreasing, GDP is likely to fall as well, countering the benefits of the tariffs for the US.
Trump may think he can win the trade war as China’s exports are much larger than the US’s exports to each other ($436bn and $122bn respectively). Statistically, the US can impose more tariffs and have a greater effect as the US’s imports of Chinese goods are greater than China’s imports of American goods. This means that China could be hurt much more by the tariffs. However, as Trump has also imposed tariffs on the EU and Canada it has led to an unlikely alliance between the imposed tariff countries. The EU, Canada and China are for trade liberalisation and this could lead to new trade agreements amongst each other. This could offset some of the effects of the US tariffs and prevent China’s GDP from dropping too much.
Another reason why Trump started this trade war was over the transfer of intellectual property issue. Currently, if foreign firms want to enter the Chinese market through a joint venture with a Chinese business partner, the foreign firm is required to transfer their intellectual property to their Chinese partner. This is in contrast to the WTO agreements of non-discriminatory treatment that China agreed upon when they became a member in 2001. The unlevel playing field is further increased by the subsidies SOEs (State Owned Enterprises) and export industries receive from the government. China could open its market to foreign companies, however it fears this will slow Chinese companies’ growth due to the increased international competition. If China continues to have many barriers to entry to the Chinese market, more countries are likely to voice their discontent, possibly with more tariffs or sanctions.
Although China has many barriers to entry, they have promised to ease these barriers starting with the insurance, banking, securities and fund sectors. China plans to raise the foreign shareholder limit to 51% and will no longer need to have held a representative office in China for 2 consecutive years for the insurance sector. It’s possible that China is finally opening up its financial market to the world as a response to Trump’s allegations but it is also possible that their rising debt is the instigator of this move. By allowing foreign insurance firms to start their businesses, they will be able to cover some of the losses incurred from the NPLs. This will reduce the effect on China’s GDP as foreign firms are taking the losses from defaulting Chinese companies. With the trade war bringing the EU, Canada and China closer together, firms from these countries may have better chances at breaking into the Chinese market. Although they may bear some of the losses from China’s high debt, they will be able to access a whole new market.
One concern for China is their increasing debt to GDP ratio. The reduced GDP growth from the tariffs and possible job losses could result in more defaults, thus more debt for China. With their debt to GDP ratio being around 250%, a shock could trigger a debt crisis leading to devastating effects in China. Liquidity for firms is already limited as a measure from the government to reduce their debt and prevent over-lending. However, this means that when firms need short-term liquidity as a result of the tariffs, they may not be able to find it and become bankrupt, further reducing China’s GDP. The China Banking and Insurance Regulatory Commission (CBIRC) warned that it is more likely for corporate defaults to happen. Although this may scare investors, it is necessary for China due to the current expectation of SOEs being bailed out, resulting in riskier behaviour and investments from these firms. With more defaults, it is a sign that risky behaviour is no longer tolerated by the government, stabilising the markets. However, too many defaults are a red flag for investors and could further reduce GDP growth from less investment.
The tariffs will inevitably end up with jobs being lost in both China and the US, trade barriers being put up and moving away from trade liberalisation, and increased tensions between the US and the world. There will be no winners from this trade war, only losers, so the real question is who will be the biggest loser?