Every day it seems, President Trump is making more threats to add tariffs to Chinese goods. In response, China threatens to do the same in retaliation. But what does this escalation of threats really mean?
The U.S. imports far more goods from China than the reverse. In fact, in 2017 the U.S. imported $506 billion in goods from China, and exported $131 billion in goods to China. So, on the surface, China can only add so many tariffs before they run out of things to tax.
The striking difference is the composition of goods imported and exported by the two powers. While the U.S. imports mainly consumer goods, such as toys, furniture, and electronics, a large percent of what China imports are basic materials. These include soybeans, scrap metal, cotton, and corn.
Most items the U.S. imports have alternative sources from other countries. Items without alternate sources will ultimately have the tariffs passed on to the U.S. consumer. There is the potential for this outcome to lead to higher inflation if widespread tariffs go into effect, which could damage both superpowers.
In China’s case, not only do they have fewer products to charge with tariffs, but many of the products are vital to the economy. It is questionable how effective tariffs would be on many of the products they import. This is especially true for commodities that trade on a world stage.
Sure, they can buy soybeans from Brazil, but this will leave a hole in the world supply somewhere. Then the U.S. producers will step in and fill it. The net effect of tariffs on a commodity is likely to be close to zero.
Still other major imports into China have strategic importance. Take wide bodied aircraft for example. There are primarily only two manufacturers in the world, Boeing and Airbus. Hitting the U.S. manufacturer with a large tariff would open the door to price gouging from the other.
The likely outcome is that trading tariffs back and forth will hurt China much more than the U.S. Certainly, some businesses that rely only on China for manufacturing will feel the pain. However, the U.S. has a lot more to lose than just some trade.
The United States has many service based companies that do business in China. Starbucks is expanding rapidly in China and expects the country to be a major source of growth. What if China decided to boot Starbucks and nationalize all the stores? Because China has opened its doors to capitalism in the last decade, it’s easy to forget that it’s still a communist country.
A reversion from embracing capitalism could be disastrous to the world economy. This is to say nothing of how it would impact the many U.S. service based companies doing business in China.
At root of the issues is the unfair trade practices China imposes on the rest of the world. These include stealing intellectual property and currency manipulation. Of course, many of President Trump’s supporters see this as an opportunity to bring manufacturing back to the states. While the President likely is playing on this for support, it is unlikely the factories that have been closed in the U.S. will ever reopen.