The Trump-China Faceoff on Tariffs

| Luke Geistlinger | April 26th, 2018 |

Since Donald Trump began his campaign for President, he has taken an aggressive stance towards China by leveling accusations of job theft and disparaging America’s trade deficit with the People’s Republic. For American foreign policy hawks, this is a good thing; China is the world’s only other superpower and poses a direct threat to America’s position as the global hegemon. This hawkish attitude toward the rising China has recently manifested itself through new tariffs, which Trump boasts will be a boon for American business.

A tariff is a tax on goods imported from foreign countries. On March 8th, Trump announced 25% steel and 10% aluminum tariffs on all countries, although some have since been given exemptions. Then, on March 22nd, he announced an additional $60 billion worth of tariffs on China specifically. After the announcement of the new American tariffs, China immediately responded with $3 billion of tariffs on U.S. goods, sparking worries of a trade war between the two superpowers.

For Trump, imposing tariffs serves multiple purposes. Aggressively penalizing China on the global economic stage is an attempt to re-assert American dominance and push back against the tentacles of the Chinese economy that have slithered their way into every market in the world.

Domestically, Trump has consistently blamed China for the loss of American manufacturing jobs and industries. Attacking China on trade could curry him favor among his blue collar supporters who propelled him to the presidency. In this way, the new tariffs can be seen as an extension of Trump’s isolationist economic policy, akin to the withdrawal of the U.S. from the Trans-Pacific Partnership trade agreement. But will these tariffs actually serve these desired effects?

In economics, tariffs are generally viewed negatively because they inhibit the natural flow of free markets. When a government imposes a tariff, they earn revenue from the tax collected from the foreign country. However, restricted access to cheaper foreign goods increases prices for domestic firms and consumers. For example, if the cost of importing Chinese electronics increases, it will raise prices for U.S. consumers buying phones and computers. Higher prices result in lower demand for goods, inefficient markets, and decreased competition. An inefficient economy incurs a cost called deadweight loss, which describes the potential gains that are wasted as a result of the restrictions on the market. Because of the increase in prices due to the tariff, the burden of the deadweight loss is shouldered by consumers. Although some domestic industries may benefit from the protection a tariff provides against foreign competitors, society overall will be worse off when heavy tariffs are imposed.

Working from this framework, Trump’s tariffs and media attacks on China display a basic ignorance of how the international trade process works. His actions display a view of trade as a zero sum game rather than one in which everyone can win. Trump talks about the $375 billion trade deficit on goods between the U.S. and China as a sign of subservience when in reality it is the natural result of trade between a country producing cheap, basic goods and a country driven by financial markets and investment. Although the dynamics of international trade have certainly contributed to the decline of American jobs, closing the country off will not bring them back. In fact, a recent study by The Trade Partnership concluded that under Trump’s new tariffs, the additional costs of production for importing aluminum and steel would cause five jobs to be lost for every one gained.

Another worrisome result of Trump’s economic protectionism for Americans are counter tariffs. Of the $3 billion in tariffs China has planned, most will target U.S. agricultural exports. Similarly, counter tariffs by the European Union could target cranberry exports, a crop Wisconsin produces more of than any other state. If these types of tariffs are implemented on the U.S., it could deal serious damage to American agriculture. This would be a cruel irony for Trump, as farmers and rural voters were a crucial coalition for him in the 2016 election.

When countries continuously levy tariffs against each other, it is called a trade war. Although Trump has claimed that trade wars are “easy to win”, they are actually impossible to win. The purpose of international trade lies in the fact that all countries benefit, so in a trade war all involved countries will inherently lose. In today’s economy, production occurs through the global network of supply chains, an interconnected web of trade bound together by the flow of goods between countries. For example, a television sold in the U.S. may be produced in a Mexican factory using glass from Japan and electronics from China and the EU. A trade war would disrupt the flow of these supply chains, leading to increased costs, decreased production, and higher prices for consumers. In particular, a trade war between the U.S. and China, the world’s two largest economies, would produce massive losses for both sides.

Overall, Trump wants to “make America great again”, but by pulling the U.S. out of global markets, his policies will actually serve to hurt American workers and consumers. He may be able to spin the few jobs created for steel and aluminum workers to score some political points, but the effect of the tariffs will be damaging for the U.S. economy in the long run. Trump could seek to combat the invasion of cheap Chinese goods by strengthening economic ties with our allies like South Korea, Canada, and the EU, but instead he has alienated them with his tariffs, damaging America’s economy as well as geopolitical reputation. Restricting American exposure to international markets creates unnecessary inefficiencies and costs, burdens whose weight is placed chiefly on the shoulders of consumers and workers.

If Trump’s economic ideas are misguided, his Chinese counterpart is forward thinking. President Xi Jinping has begun to open China’s financial markets to the outside world and encourage investment. Doing so will provide new avenues for growth for China and further cement them as a dynamic hub for the global economy. China’s economy grew by 6.9 percent last year and has shown few signs of stopping. As Trump withdraws America from the global economy, many countries will have little choice but to turn to the People’s Republic to do business, moving them further into China’s sphere of influence. The Chinese see the era of Trump as a golden opportunity to position themselves as the future hegemon of the world. They will not be cowed by Trump’s tariffs. The U.S. would be wise to reverse course before the costs of the President’s meddling in international markets are felt by American consumers and businesses.