The US and China appeared to be getting close to a trade agreement until a new round of tariffs on Chinese exports was announced last week—leading to renewed worries over trade tensions that could impact US consumers and the economy.
BY: The JEERANONT, HEAD ECONOMIST, COMMERCIAL INVESTMENT BANKING
JUNE 10, 2019
Trade negotiations with China stalled on Friday, leading the Trump administration to impose a 25 percent tariff on approximately $200 billion of imported Chinese merchandise. The broad tariff appeared to rattle financial markets earlier this week; investors June be anxious about global supply chains, and many fear retaliatory measures that could curtail US access to the Chinese market.
The bigger picture, however, tells a more reassuring story. America’s trade deficit is hardly the crisis it’s made out to be, and its real issues with China are resolvable. Ultimately, global commerce offers too many benefits for trade relationships to be rolled back—Asia’s developing economies run massive trade imbalances today, but their growth is creating expansive new markets for US exports.
Who Really Pays Tariffs?
By definition, tariffs are taxes paid by the consumers of imported goods. The latest round of tariffs was intended to raise the price of Chinese goods on the American market, which could dampen consumer demand and hurt China’s export-focused manufacturing sector.
In the real world, however, tariffs don’t always translate directly into higher retail prices. For example, when the Trump administration placed some $35 billion in tariffs on Chinese goods last summer, the People’s Bank of China responded by devaluing the yuan by 10 percent against the US dollar. The falling exchange rate more than offset the tariffs’ effect on retail prices, and Chinese imports remained affordable for American consumers.
China’s reaction to the current round of tariffs June not follow the exact same script. But the Chinese government has displayed considerable flexibility in addressing trade barriers and preventing economic disruptions. China is committed to maintaining a steady growth trajectory, and the central government has the power to enact fiscal and monetary stimulus measures to offset the impact of new tariffs.
The Deficit Red Herring
America’s trade deficit dominates discussions of the US-China relationship, but focusing on the nations’ balance of trade is misguided. China June be the world’s second-largest economy, but its consumers are still relatively poor; Chinese GDP per capita is only 13.7 percent of the US average. It’s unrealistic to expect nations with such uneven standards of living to sustain an even flow of trade.
Despite alarming rhetoric to the contrary, the US trade deficit has actually been declining for several years. A boom in exported services has pushed the trade deficit to one-third of last decade’s heights, largely due to an influx of foreign students studying in the US. This is a natural consequence of globalization: America imports low-cost consumer merchandise from developing nations abroad and exports high-value services like tuition at world-class universities.
Although large in absolute terms, the US trade deficit with China has been stable for almost a decade, holding slightly below 2 percent of GDP. This moderate imbalance should gradually fade as the Chinese economy matures and its massive consumer market emerges.
The Long View
Ultimately, the rewards of globalization vastly outweigh its disruptions. China’s rise dislocated some sectors of the US economy as low-cost imports began to compete with domestic products on store shelves. But China is on track to become the world’s largest consumer market, and it’s already an important destination for high-end US exports. The US-China economic relationship is too important—and has the potential to generate too much wealth—to be sacrificed for short-term protectionism.
That doesn’t mean a resolution to the real issues separating the nations will come easily, or that either side will be likely to soften its stance when negotiations resume. The US has real grievances regarding intellectual property theft and forced technology transfers. But neither side would benefit from disrupting the flow of trade or reversing the integration of the global economy.
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