President Trump's tariffs on China will not have a negative impact on U.S. consumers
Donald Trump's proposal impose a 60% tariff on all imports from China Eliciting cries of agony from all the usual suspects. Fortunately, their gloom and doom has little basis in economics.
First of all, this is not 2016. The global economy and U.S. businesses have already adapted to the idea that tariffs will also increase. China's dominance in global manufacturing is unlikely to continue unabated. After the experience of President Trump's first few tariffs, China's increasingly paranoid totalitarianism, and dependence on China during the pandemic supply chain crisis, we will not “go back” to the pre-Trump era. It's been obvious for years. Era. Even Joe Biden maintained most of President Trump's once widely criticized China tariffs.
Of course, the biggest complaint is the claim that higher tariffs will increase consumer prices. But history shows this to be wrong. According to a recent Bank of America memo, the current average tariff on imports from China is 19%. But before the recent inflation problems (even tariff critics admit they had nothing to do with import duties)The price of imported goods from China has not increased..
why? As a result of a combination of factors, Chinese manufacturers absorbed some of the tariffs through currency devaluation and lower prices, while U.S. importers squeezed margins to remain competitive. Simply put, most of these tariffs did not apply to American consumers.
You also need to keep the big picture in mind. President Trump's tariffs are not just about economic policy. They are foreign policy and national security tools; reduce America's dependence on Chinese products. The tariffs would also have the beneficial effect of shifting production to friendlier, poorer countries, strengthening the United States as a world leader, and perhaps reducing pressure on its borders from people fleeing poverty at home. It may also bring about
Impact of inflation: more bubbles than fire
Let's start with some basic numbers. According to bank of americaThe United States imported about $430 billion worth of goods from China last year. A 60% tariff on these products would theoretically equate to about $170 billion in tariffs. According to their research, if all these costs were passed on to consumers – a big “what if” – inflation could rise by up to 0.9 percentage points. But this is a worst-case scenario, a “partial equilibrium” analysis that ignores how the broader economy will adjust.
First, the Chinese yuan is unlikely to remain stable in the face of such tariffs. Bank of America reminds us of what happened during President Trump's first term. When President Trump raised tariffs in 2018 and 2019, The renminbi depreciated by almost 13% against the dollar. This exchange rate movement absorbed much of the tariff shock, making Chinese goods cheaper for U.S. buyers and reducing the inflationary effect. We can naturally expect a similar move this time as well.
President Donald Trump, surrounded by American steelworkers, signs Proclamation 232 on Steel and Aluminum Imports, which imposes tariffs to protect the American steel industry, at the White House on March 9, 2018. (Official White House photo, Joyce N. Bogosian, via Flickr)
Then there is the question of how much of these costs are actually passed on to consumers. Retailers face intense competition and are wary of losing market share. It is likely that some of the tariffs will be absorbed by margins.. This is exactly what happened with President Trump's first round of tariffs. The lesson here is clear. Companies cannot always pass on all tariff costs to consumers, especially when competition is high.
It is also important to keep in mind Revenue generated by customs duties Don't just disappear. These can be used to reduce budget deficits, increase government spending, or reduce other taxes. In other words, Taxes collected do not come out of the economy.. Transferred from the bank accounts of foreign producers and importers to taxpayers.
Supply chains and substitutes: cushioning the impact
Another point Bank of America emphasized was the nature of US-China trade. Many of the products that the United States imports from China are intermediate or capital goods rather than direct consumption goods—Products used in the manufacture of other goods. This limits the direct impact on consumer prices. Tariffs are spread across different stages of production, meaning the seal shock at retail stores will not be as pronounced as some might expect.
Much of the impact of tariffs on prices depends on the availability of substitutes. If a U.S. retailer can switch to products from other countries, or increase domestic productionthe impact of inflation will further slow down. Actually this is substitution effect Such problems are already occurring as U.S. companies gradually shift their supply chains out of China in response to the trade war. President Trump's tariffs are likely to accelerate this trend, creating more resilient and diverse supply chains for U.S. companies.
Fallacy of China's economic “superiority”
Economists often mistakenly assume that just because China currently produces a product, it must be the cheapest producer of that product. in this A naive view of the trade balancethe fact that something is produced somewhere proves that the current producer must be economically advantageous in producing it. But in reality, Chinese plunder Goods are produced in China and exported around the world, not necessarily because it's more efficient, but because it's the price we pay for access to Chinese consumers. .
Think of it this way. If you want to produce your widgets in one factory and take advantage of economies of scale and geographic concentration and specialization, you will likely build your widgets where quality-controlled production is cheapest. But if China imposes trade barriers and the United States does not, Load the dice with priority given to Chinese production. Today, much production takes place in China not because of market forces, but because of trade and economic policies that favor Chinese manufacturing.
Another technology that China uses for land-based production is The threat of dumping due to subsidies. By dumping below-cost products onto the market, and indeed threatening to wipe out investment in production outside China, China can: maintain oligopolistic control across targeted industries. This allows it to charge higher prices than would be possible in a competitive market, since higher prices would not create competitors.
And once China dominates an industry, it is likely to continue to do so. Rewards for control create barriers to entry. Apple CEO Tim Cook recently demonstrated this when he explained: Why does Apple make mobile phones in China?.
“The reason is because of the skills, the amount of skills in one place, and the types of skills,” he said.
This is not a matter of comparative advantage. China's land and people are somehow not naturally good at making phones. That is the advantage of mercantilism. China's predatory policies have reduced it to an oligopoly, so it makes sense to manufacture in China.
President Trump's new tariffs on China would simply be: Offsetting the mercantilism practiced by China. Perhaps the strongest criticism against them is that 60% may not be enough. More efforts may be needed to pull production away from China, but President Trump's promise of deep corporate tax cuts on domestic U.S. production may also help.
china pays tariffs
At the end of the day, China will bear the brunt of these tariffs.. The true inflationary effect of a 60% tariff on Chinese goods will likely be negligible, thanks to factors such as currency adjustments, retailer margins, and shifts to alternative supply chains. The Trump tax cuts will improve the impact on U.S. importers' profits. In other words, the real cost of tariffs will be borne by Chinese producers.
Look at what the International Monetary Fund said about the US economy. It is expected to become the world's strongest in the coming years and will provide most of the driving force for global growth. China's growth is expected to be even slower than already expected. In other words, the US economy is not affected by the so-called trade war, but China's economy is sluggish.
