Finally, White House has confirmed the imposition of 25% tariffs on $50 billion worth of imports from China. China retaliated, saying it will impose an additional 25% tariff on 659 US goods worth $50bn. Tit for tat!
After Trump’s withdrawal from JCPOA (Iran nuclear deal), you can expect anything from him and his administration! On Tuesday, White House withdrew from another deal; this time it is China.
As earlier this month, administrations of both countries came to negotiating table after Trump threatened China of trade tariffs on $50 billion worth of its exports to US. As a result of that US delayed tariff imposition but on Tuesday 29th May, the White House announced that it will proceed with plans to impose 25 percent tariffs on $50 billion worth of Chinese exports to US. And they did that!
Believe me, Trump is just too bad when it comes to taking decisions. Trade war with China is going to cost more to United States then it would to the Chinese economy. Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. US has put allegations on China that it forces US firms to partner with Chinese companies if they want to do business in China and that allows it to steal American intellectual property. Trump administration has already unveiled a list of 1300 Chinese exports which included aircraft parts, medical devices and flat screen TVs on which US will levy tariffs. To President Donald Trump, it will be a decisive victory for the United States because it has $375 billion trade deficit with China (more than what China has with US) so it can damage China in many ways, but again I will repeat that he is extremely bad at analysing the situation before taking any decision. Trump is not precise about the possible effects of protectionism on United States and that will hit US economy hard.
Trump administration’s goal is to pressurise Chinese high-tech products industries and therefore it has included majority of such products in the list of goods that will come under the influence of US new tariffs. Furthermore, President Xi’s “Made in China 2025” program, a massive government funded initiative to make China largest and world-class producer of high-tech electronics, especially robotics, is a headache for Trump. He doesn’t want to see Chinese tech industry to surpass US’s in terms of quality and quantity.
Iowa, Ohio, Indiana and Missouri are largest producers of soybean crop and if China will impose high duties on this American product, it ultimately will result in farmers losing money and huge unemployment as well. Republicans do not want to see these states suffering from economic instability
For Trump, levying tariffs will make things right for US but let me tell you why he is wrong.
- It is important to discuss China’s reaction to this. After White House’s announcement on April 3rd, China also announced to levy 25 percent tariffs on 100 US exports to it. And now it did that in retaliation to US imposition of heavy tariffs on Chinese imports. The list includes aircrafts, automobile and soybeans. Tariffs on soybean will affect Trump and Republicans personally. One third of all soybean produce by US is bought by China, and that makes it largest importer of American agricultural output. Iowa, Ohio, Indiana and Missouri are largest producers of soybean crop and if China will impose high duties on this American product, it ultimately will result in farmers losing money and huge unemployment as well. Republicans do not want to see these states suffering from economic instability as they comprise majority of Republican Party supporters and Trump won’t be able to see losing majority in 2018 and 2020 elections. Hitting Chinese imports hard with high duties has a huge price!
- China could also intervene in the activities of US companies that depend on supply chain in China. Let us take an example of Apple’s iPhone. China can delay iPhone’s shipment to US and can also put pressure in manufacturing process of such products. Thus an indirect pressure can be built on US economy.
- Trump’s list of Chinese imports also includes intermediary parts that US companies buy to make finished goods. 85% of goods on the list are either heavy machinery that firms in US buy to make finished goods or intermediary inputs that make up finished goods. One could say that by doing so companies in US then will buy home-manufactured machinery and intermediate inputs but chances are that most of the firms that will be heavily affected will shift their manufacturing plants to other countries where no such tariffs have been imposed on Chinese imports, thus will lower the ultimate production cost. One of the main reasons why American firms buy Chinese intermediate inputs and machinery is that they cost much lower and have good quality as compared to US manufactured ones. This shifting will result in huge unemployment in US and will affect its GDP.
- Buying Chinese products help American citizens save a lot of money. The money they save help them improving quality of their lives by increasing their purchasing power to some extent. It is approximately eight hundred and fifty USD per year that a typical household save just by buying Chinese manufactured goods. When this money is used to buy other goods and services in US, it helps American economy to grow.
Most important thing here is to understand that trade war has losers, and only losers. No one wins. With each party’s action to ruin opponent’s economy and the equal and opposite reaction makes everyone worse-off. You will see businesses suffering and unemployment skyrocketing. With purchasing power and quality of living declining, how come you may think of markets functioning well? Monopolies and corruption prevail as a result. Nations suffer in the end. People and firms hopelessly leaving the markets won’t make society work for all. Protectionism is a blessing in short run, especially for a developing nation but when a developed nation acquires it against another such nation, we see dire consequences.
President Trump wants to increase employment opportunities in America but protectionist policies won’t help him achieve his goal. A decrease in Chinese-manufactured imports will limit the choices for consumers in the market. China has comparative advantage in the production of high-tech electronics and therefore after the imposition of tariffs, Americans will face shortage of low cost electronics and thus will pay more for the American manufactured stuff. Both China and the US will suffer as a result of a trade war but this time it is United States that will suffer the most.
President Trump, protectionism won’t make “America Great Again!”