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The US-China Trade War

September 04, 2018
On July 6, 2018, the Trump administration implemented tariffs on $34 billion of imported goods from China, with a tax on another $16 billion to follow.[1] President Trump claimed that the latest defensive trade measure since March of this year was necessary to lessen the trade deficit with China and combat the theft of U.S. intellectual property.[2] China has responded in kind with equivalent taxes on $34 billion of U.S. goods.[3] Actions from both sides may indicate the beginnings of a trade war of attrition. What are the implications for U.S. industry?

Part of the largest U.S. protectionist actions since the 1930 Hawley–Smoot Tariff, the Trump administration’s 25% tax on Chinese imports covered categories of products from industries such as aerospace, robotics, machinery, and information and communication technology.[4] Chinese retaliation focused on some of the United States’ largest industries including soybeans, pork, automobiles, and airplanes. This has sparked a variety of reaction and criticism from those affected.

China is the largest buyer of U.S. soybeans, a market worth around $14 billion annually.[5] Midwest soybean farmers such as John Heisdorffer, president of the American Soybean Association, have voiced concerns over these new developments: “We just ask the administration to back away from using tariffs to achieve U.S. trade policy goals. The scorched-earth approach is really going to cost us.”[6] Cost it may indeed, as the price of U.S. soybeans have dropped as much as 5% in some areas of the country.[7] There are domestic fears that South American soybean growers, such as those in Brazil and Argentina, will look to capitalize on the opening left from the Chinese tariffs, a market share that is not easily won.[8]

Image: American soybean prices have declined since China's tariffs. Source: BloombergImage: American soybean prices have declined since China's tariffs. Source: Bloomberg

American automakers and airplane producers have also been negatively impacted. Large manufacturers such as General Motors Co., Ford, and Tesla have been dealing with the effects of the Chinese tariffs.[9] Representatives for some of these industry groups have encouraged the administration to pursue other means of trade negotiation with China rather than relying on blow-for-blow tariffs. Smaller producers that manufacture mechanical parts for large companies have been harmed as well. In some cases, these groups now pay 25% more on components purchased from China.[10] However, the Trump administration is confident that their trade strategy will pay off. “We may have a little bit of short-term pain, but we’re certainly going to have long-term success,” said White House press secretary Sarah Huckabee Sanders.[11]

Image: The U.S. hopes to lower its trade deficit with China. Source: CNNImage: The U.S. hopes to lower its trade deficit with China. Source: CNN

Some industry professionals have lauded the president’s approach to trade. John Ferriola, CEO of Nucor, the largest U.S. steel producer, called some of President Trump’s actions “leveling the playing field” against the “bad actor,” China.[12] The new tariffs will be a boon for the American metalworking industry, as Chinese steel and aluminum imports face new duties.[13] Scott Paul, president of the Alliance for American Manufacturing noted that the administration’s trade strategy is the correct response to Chinese policy that has harmed American industry.[14]

As expected, the trade war will help create jobs in import-competing industries and harm export jobs to China. However, this could be problematic considering how the latter group often yields higher paying jobs and contributes heavily to the economy.[15] Taking a broader view, some economists do not believe the tariffs are a major concern for the United States. According to Jim O’Sullivan of High Frequency Economics, “25 percent tariffs on $50 billion of goods is not a big deal from a macro perspective — [it] adds less than 0.1 percent to the cost structure of the economy. The issue is whether there is retaliation to the retaliation and so on.”[16] This issue is an open-ended question; the president has suggested that he would be willing to possibly raise tariffs on up to $500 billion of Chinese goods if China does not acquiesce.[17] Economists such as Bank of America Merrill Lynch’s Michelle Meyer worry that the current trade hostility could lead to a recession if matters spiral out of control.[18]

With the recent July 6th tariffs and the threat of more to follow, it remains uncertain whether de-escalation will be an option any time soon. Nonetheless, Boeing has been working to prevent further escalation between the U.S. and China, hoping for a mutually agreeable outcome. In a statement, CEO Dennis Muilenburg said, “Our voice is being heard. We are engaged with the US government and with the Chinese government… I’m hopeful we’ll come to a good resolution.”[19] However, reaching a speedy resolution may not be an easy task. So far, both sides have not indicated a large willingness to compromise their trade interests. In the case of a prolonged trade contest, the necessary steps should be taken to ensure the protection of vulnerable American industries. A negotiated compromise is always preferable to a Pyrrhic victory.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1] http://thehill.com/opinion/finance/395819-Hunker-down-Trade-war-off-ramp-wont-appear-until-2019

  [2] https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-additional-proposed-section-301-remedies/

  [3]https://www.bbc.com/news/business-44765760

  [4] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/april/under-section-301-action-ustr

  [5] https://www.bloomberg.com/news/articles/2018-04-04/as-china-fires-back-in-trade-war-here-are-the-winners-and-losers

  [6]https://www.nytimes.com/aponline/2018/07/06/business/ap-us-us-china-tariffs-reaction.html

  [7]https://www.bloomberg.com/news/articles/2018-04-04/china-to-levy-25-tariffs-on-u-s-soybean-imports-cctv-reports

  [8]https://www.bloomberg.com/news/articles/2018-04-04/as-china-fires-back-in-trade-war-here-are-the-winners-and-losers

  [9]dhttps://www.washingtonpost.com/world/asia_pacific/china-fires-back-at-trump-with-tariffs-on-106-us-products-including-soybeans-cars/2018/04/04/338134f4-37d8-11e8-b57c-9445cc4dfa5e_story.html?utm_term=.b1c35b2ea656

  [10]https://www.nytimes.com/2018/07/05/business/china-us-trade-war-trump-tariffs.html

  [11]https://www.politico.com/story/2018/04/04/china-tariffs-us-imports-trump-500163

  [12] https://www.cnbc.com/2018/03/05/nucor-ceo-trump-tariffs-are-treating-countries-how-they-treat-us.html

  [13]https://www.bloomberg.com/news/articles/2018-04-04/as-china-fires-back-in-trade-war-here-are-the-winners-and-losers

  [14]https://www.nytimes.com/aponline/2018/07/06/business/ap-us-us-china-tariffs-reaction.html

  [15]http://thehill.com/opinion/finance/395819-Hunker-down-Trade-war-off-ramp-wont-appear-until-2019

  [16]https://www.washingtonpost.com/world/asia_pacific/china-fires-back-at-trump-with-tariffs-on-106-us-products-including-soybeans-cars/2018/04/04/338134f4-37d8-11e8-b57c-9445cc4dfa5e_story.html?utm_term=.b1c35b2ea656

  [17]https://money.cnn.com/2018/07/06/news/economy/us-china-trade-war-tariffs/index.html

  [18]https://money.cnn.com/2018/07/06/news/economy/trade-war-recession/index.html?iid=EL

  [19]https://www.ft.com/content/ab2839da-8819-11e8-bf9e-8771d5404543

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