Despite the rhetoric the US administration has used to rail against trading with China, the tariffs prescribed by President Donald Trump will neither cure America’s perceived ailment of trade imbalances nor deter the Chinese government from maintaining its export-reliant agenda.
The proposed tariffs – 25% on steel and 10% on aluminum imports – are counterproductive for the US. Even if the tariff impositions save a few aluminum smelters and steel mills in the short term, they risk millions of other jobs in industries such as breweries, food processors, and automobiles that rely on steel and aluminum as productive inputs. Ultimately, the policy will destroy more jobs in the US than it may protect.
Economists have long established that a country’s trade patterns are determined by what it’s relatively better at producing, or in economics jargon, its “comparative advantage.” If Chinese factories can make clothes more cheaply relative to their US counterparts because of lower labor costs, then China will tend to export clothes and import products that it’s not as good at producing, such as airplanes.
Steel and aluminum are just not America’s relative strengths. Steel produced in the US, for example, is 20% pricier than that supplied by other countries. Domestic manufacturers will, of course, want to buy it elsewhere rather than at home.
When tariffs are slapped on to steel and aluminum shipments from overseas, not only will they exacerbate US trade deficits, but they also bode ill for the stock market. Domestic companies will inevitably suffer from higher input costs and lose their competitiveness. As a result, they will become less able to sell to foreign markets, leading to a deterioration of trade balances for the US.
Moreover, more expensive manufacturing materials will translate to higher prices at the cash register, putting upward pressure on inflation and prompting the US Federal Reserve to raise interest rates even more aggressively than anticipated. This will add to investors’ anxiety and foster an unfavorable environment for equities.
From Beijing’s perspective, the US is, to use a Chinese idiom, “lifting a rock only to smash its own feet.”
From Beijing’s perspective, the US is, to use a Chinese idiom, ‘lifting a rock only to smash its own feet’
Even ignoring detrimental ramifications to the US economy, the direct impact of the tariff plan on China is likely limited because of that country’s insignificant role in US imports of steel and aluminum. China isn’t even among America’s top 10 import sources for steel.
Although Canada and Mexico have been exempted, other major exporters such as Brazil, South Korea and Russia will have more to worry about a US tariff on steel. Europe, too, will not stand idly by because of a potential steel glut caused by diverted trade flows.
Not being an immediate victim, Beijing has been afforded the luxury to wait and see how the situation evolves first, instead of resorting to retaliatory action rashly.
If the Trump tariffs on steel and aluminum escalate into a trade war, China has ammunition to deploy against the US. As the top export destination for US soybeans, China could levy a tariff on agricultural imports from the US, which would cause financial pain to farmers in Midwestern states such as Iowa, Nebraska and Indiana. Although these states were part of Trump’s support base during the 2016 presidential election, disillusioned voters will force the White House to regret instigating a trade war sooner or later.
And don’t forget, China remains the largest foreign buyer of US Treasury securities, holding a whopping US$1.2 trillion as of late 2017. If Beijing dumps its holdings, it will disrupt not just Wall Street but the financial system around the globe.
Holding these weapons, policymakers in China will see little reason to kowtow to US pressure and deviate from their export-oriented growth path.
Contrary to what President Trump has boasted, a trade war is neither “good” nor “easy to win.” It’s terrible, and everyone loses in the end.
We can only hope that the two biggest players in the world economy won’t get into a tug-of-war of protectionism with tit-for-tat tactics.