From the President’s Desk: Who Loses the Most in a Trade War with China

  • by itradmin - Wed, 03/28/2018 - 14:06

Two important sets of numbers

President Trump announced $60bn in tariffs against a broad swath of Chinese made goods coming into the US. The stated reason for the tariffs is to punish China for the theft of intellectual property. He is certainly not wrong in terms of the theft of IT. China said that these tariffs are a declaration of a trade war and they will respond.

It seems to me, China will lose a trade war with the US for the simple reason that we are their biggest customer and they need us more than we need them (on a macro basis). This is not to say that some importing entities won’t get hurt, but the impact on US GDP is minimal. I say this not out of blind patriotism, but from the perspective of economic analysis, upon which all our economic consulting is based.

Data Point #1:

  • Exports from the US to China stand at $130.1 billion, or 0.7% of US GDP.
  • Exports from China to the US are a record-high $446.9 billion, or 3.8% of China GDP.

A slowdown in exports to the US will hurt China’s economy much more than ours given their higher dependence on exports to the US for economic growth.

There are three potential consequences in the US of these tariffs:

  • 1. It is likely to stoke inflation in many areas of the economy as it is unlikely that US importers will willingly absorb the costs.
  • 2. China could decide to manufacture goods downstream from the tariffed items and thus try to avoid the tariff altogether (this won’t work on a lot of steel imports but it may on other goods).
  • 3. These tariffs could cost US jobs in manufacturing and all phases of the exporting process (e.g., trucking, rail, shipyards, shipping industry).

The following is a list of the ten largest exports from the US to China. People in these industries could suffer job loss, and businesses could realize lower or the entire loss of profits.

List of Largest Exports from US to China

Data Point #2:

The gap between manufacturing costs in the US and the east coast of China in 2016 was down to 1%, according to the Harvard Business Review. (Please note that the 1% gap was before the implementation of the 2018 tariffs.)

A 1%, or smaller, gap means that manufacturing in the US can expect increased attention from US firms currently producing goods in China. Domestically-made goods don’t face the same risk of escalation of long-distance shipping costs and the risk of political disruption, which is not limited to the implementation of tariffs.

The manufacturing gap has narrowed because of aggressive re-engineering and automation implementation in the US and increased costs in China. US firms need to continue to be aggressive in these areas and continue to modernize our manufacturing base. Enough effort in this area is likely to eradicate any cost advantage currently held by China.

The bottom line to data point number two: The fact that the gap has narrowed without tariffs suggests that the implementation of tariffs by the US is indeed punitive in nature, much more than it is economic in nature.

Alan Beaulieu