- On May 10th 2019, the US increased tariffs from 10% to 25% on $200 billion of Chinese imports.
- The US introduced the tariffs in response to China backing away from commitments it made to change Chinese laws to solidify reforms that make it easier for US companies to do business in China.
- In response to the US tariff hikes, China announced it would also raise tariffs to 25% on $60 billion worth of imports, affecting 2,493 US products.
- In retaliation to the Chinese retaliation, the US Trade Representatives office (USTR) have released a list containing a further $300 billion worth of tariffs on Chinese imports which would be subject to a 25% tariff. However, it could take several months to put together, which means negotiations may improve before they go into effect.
- If the US does proceed to implement the extra tariffs almost all Chinese imports would be subject to punitive import duties
- The new set of tariffs would cover products which would have a more direct impact on consumers which the USTR specifically attempted to avoid previously. US consumer goods are only 25% of the items targeted so far, as much as 60% of the remaining imports are from China.
What Could It Mean?
- Economists from MIT recently tested to see if Lerner’s theory worked in practice during 2018. They concluded it mostly does.
- Lerner’s theory suggests that when a nation raises duties on imports its currency will adjust to compensate.
- This means if there is lower demand for imports, this will shrink the value of the trading partner’s currency. However, the increased strength of the domestic currency will harm exporters.
- The IMF recently finished a huge study of free markets on 151 countries over 51 years. They concluded that “tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance.”
Why Does It Matter?
- Most economic studies have found that American businesses and consumers take a bigger hit from tariffs compared to China because importers respond by increasing prices to cover all or most of the tariff when the products land in the US. There has been no clear evidence that Chinese exporters have cut costs to compensate.
- The Retail Metrics Consultancy estimated the boost to 25% from 10% on the current tariffs could push up Chinese retail products by 3% to 8%.
- A recent study reported that when the prices on imported Chinese goods increased, US domestic producers noticeably increased prices for larger profits.
- Therefore, tariffs on Chinese goods lead to higher costs for Americans and reduced consumption.
- Federal Reserve officials such as John Williams are watching out for a boost in inflation due to higher consumer prices.
- There are also concerns that a worsening trade war could damage growth and reduce confidence from consumers, businesses and the financial markets.
- This could create a bit of a tough spot for the Federal Reserve which has currently put a halt to raising rates, as they may have to tackle increasing inflation and a slowing economy.
- Some economists have argued that a bigger problem for the Federal Reserve will be growth implications as tariff increases should, in principle, be removed from inflation numbers once they are put in place.
- A recent New York Federal Reserve study found that, so far, tariffs have fallen on domestic consumers, creating a drain on the economy of $1.4 billion per month at the end of 2018.
- The US decision to boost tariffs would see that number rise to $4.4 billion per month. If the new tariffs are implemented, that number is set to increase to $8.8 billion per month.
Some Useful Facts
- The US imported a record $539 billion in goods from China in 2018.
- The US exported $120.3 billion in goods to China in 2018.
- US exports to China declined in 2018 by just over $10 billion.
- US farm exports fell from $15.9 billion in 2017 to $5.9 billion in 2018 as buyers moved away from American soybean and corn.