President Trump recently announced, via Twitter, that the U.S. will implement a 10% tariff on an additional $300 billion worth of Chinese imports. This latest round of tariff hikes comes on top of the 25% tariffs on approximately $250 billion of imported Chinese products already in place – effectively placing a tariff on all goods imported from China. Further escalating trade tensions, the president went on to label China a currency manipulator after Beijing said it would halt purchases of American farm products and allowed its currency to weaken.
In turn, China has retaliated by slapping tariffs on about $110 billion of U.S. exports. The result of the escalating trade war? Higher costs for American businesses and consumers on commonly used products and materials, sapping the vitality of the U.S. economy and threatening to make the benefits of tax and regulatory reform a distant memory.
The objective of reaching a more fair trading relationship with China makes enormous sense. However, the cost of tariffs almost always falls to American businesses and families. The U.S. imports quite a bit of everyday merchandise from China – in fact, Chinese imports totaled $539.5 billion last year, according to the Office of the U.S. Trade Representative. And the last round of U.S. tariffs, which were implemented in May, cost the average American household $500, according to Katheryn Russ, an economics professor at the University of California at Davis.
With this new tariff, manufacturers, farmers, and technology companies will all take a revenue hit as costs on commonly used products and materials rise – risking a decrease in the U.S.’ recent economic resurgence. A large portion of these proposed tariffs would pertain to consumer goods and technologies such as laptops, tablets, and cellphones, hitting retail markets just as the school year begins and heading into the all-important end-of-year holiday season.
While this new tariff is 10%, compared to previous tariffs of 25%, U.S. companies across industries are still likely to be affected. As Sage Chandler, vice president of international trade for the Consumer Technology Association points out, “Technology is now the backbone of so many other industries,” and therefore, tariffs of this magnitude could “hit far beyond the technology industry.” As a result, production for U.S. companies could become increasingly expensive and the prices on these technologies could increase for American consumers.
To this very point, the U.S. Chamber of Commerce China Center earlier this year released an assessment of the escalation of U.S.-China tariffs under the Section 301 case. Using a dynamic computable general equilibrium (CGE) model, which is an economic model that uses actual economic data to predict outcomes, we simulated the impact of three tariff escalation scenarios and found:
- Escalation of bilateral tariffs results in lower GDP, lower employment, lower investment, and lower trade flows for the United States. The annual hit to U.S. GDP ranges from $45 billion to $60 billion in year one, and grows to a range from $89 billion to $125 billion five years later. Cumulatively, the U.S. economy stands to come up $1 trillion short of its baseline potential within ten years of tariff implementation.
- Tariffs would not just hurt tech-intensive industries but also undermine the benefits an open ICT sector offers to the broader economy. Milder scenarios shave up to one-third of a percentage point in TFP from real U.S. GDP growth, threatening a key channel for transmission of the benefits of an open ICT sector to the economy.
As tariffs rapidly escalate, American companies are now being forced to confront these stark realities on an accelerated basis. According to Nikkei Asian Review, more than 50 international companies are at least considering moving production out of China.
The risk of continued tariffs and uncertainty about the future of trade with China is rightfully too big of a gamble for some companies. Many had already begun the process of moving to other countries as production costs in China have risen substantially in recent years, but the pace and scope of such shifts are accelerating. For many U.S. companies, reconfiguring supply chains will take years and, as the Nikkei Asian review reports, “many manufacturers will be forced to set up dual supply chains” that will increase costs and decrease profits – resulting in higher prices for American consumers. Many companies rightfully worry that such a move will result in a net loss of American manufacturing, rather than the on-shoring of jobs from China, given the realities of the global supply chain.
Both nations need to work together to put an end to the trade war. U.S. Chamber CEO Tom Donohue recently stressed that despite the “collateral issues” in terms of China participating in “the theft of intellectual property… there’s enough pressure in both places to move in the right direction.”
The administration is entirely correct in its efforts to address the broad range of unfair Chinese commercial, regulatory, and anticompetitive policies and predatory practices that undermine the value of U.S. intellectual property rights. However, tariffs are the wrong tool to achieve these legitimate objectives. The stability of the U.S.-China commercial relationship is too critical of an issue for American companies, workers, and consumers.