Trump's tariff card against China

High tariffs may do harm to US, not spur growth of its manufacturing industry

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KARACHI:

US President Donald Trump has announced that a new 10% across-the-board tariff on Chinese goods could be imposed as soon as February 1. If he follows through on his threat, what will cost the Americans more?

Unlike Mexico and Canada, which largely avoid tariffs on exports to the United States because of the USMCA (the United States-Mexico-Canada) trade agreement which Trump signed in his first term, a wide array of Chinese goods currently face tariffs. The high tariff strategy may do harm to America and not spur growth of the manufacturing industry, while making the world poorer and the US as well.

The Economist reported that more than 90 years ago, America's 32nd and longest serving president Franklin Delano Roosevelt surveyed the wreckage of the Great Depression. He pointed to one of its causes: sky-high tariffs had put America on the "road to ruin" by inviting retaliation and suffocating investment. It was a painful lesson and it took decades of sustained global effort, led by America, to bring tariffs down and let commerce flourish.

Trump sees tariffs as a simple tool to achieve multiple objectives: shrinking America's trade deficit, rebuilding its manufacturing might and generating a gusher of revenue for the government. On every count, he is wrong. That is hardly a recipe for a manufacturing renaissance.

Like Trump, America's 25th president William McKinley was a "tariff man" as he swung America towards protectionism in the late 19th century. "President McKinley made our country very rich through tariffs and through talent," said Trump in his inaugural address.

"We must not repose in fancied security that we can forever sell everything and buy little or nothing," McKinley announced in Buffalo, New York, in 1901, before adding that "commercial wars are unprofitable". America's 45th and 47th president has perhaps not learnt correct lessons from his predecessor.

Trump has announced plans for tariffs on China, Canada and Mexico since taking office, but many other countries worldwide are also bracing for similar measures.

It was Trump's latest trade threat against China, the world's second-largest economy after the US, and Washington's biggest geopolitical rival, according to Al Jazeera TV channel.

If the intent of the proposed tariffs was to hurt Chinese exports, in a bid to push for US interests in their trade relationship, Trump's threats - so far at least - appear to have had the opposite effect. China's overall exports, including to the US, have grown in recent months.

In the first 11 months of 2024, Chinese exports to the US totalled about $401 billion, while China imported approximately $131 billion in goods from the US.

International trade expert and economic analyst Aadil Nakhoda, who is also Assistant Professor at IBA Karachi and Chair of the Economic Advisory Group, said Trump's tariffs on China are likely to cost the US economy as well as create challenges for firms participating in international trading activities.

Some calculations suggest that the US economy may shrink up to 1% and face job losses of approximately 700,000. It will also lead to high prices for consumers, with the poorer segment more likely to be impacted based on their income levels.

Several consumer items are likely to become more expensive as China is a major source for them. It may also affect the quality of products as American producers may not have the necessary alternative inputs and expertise in products where Chinese businesses are the main producers. Therefore, it will impact the price and quality of products.

"We may also observe retaliation by the Chinese government to reduce their dependence on American imports. We will likely experience supply chain disruptions as raw material and intermediate goods suppliers may see shifts and reduction in demand. Volatility in prices will also impact other countries as both the US and China are major importers and exporters of several products," Nakhoda said.

Regional expert and Centre for South Asia & International Studies (CSAIS) Islamabad Executive Director Dr Mehmoodul Hassan Khan said as expected Donald Trump thundered about imposing high tariffs on Chinese goods in his inaugural speech, showing imminent start of trade war 2.0 with China. Thus, Trump once again played the "tariff card".

Ironically, the US central bank authorities, the Peterson Institute for International Economics and Moody's, all believe that the additional 10% tariff will cause US inflation to rise by 0.9 to 1.5 percentage points and its GDP growth to fall by 1 to 1.4 percentage points, vividly reflecting the severe economic impact of high tariffs on Chinese goods and creating no good for the US economy, industry, supply chain, society, consumer market and last but not least automobile, steel, engineering and household industries will also be affected. Therefore, the 10% additional tariff will reduce annual household incomes by $2,576, taking into account the impact of possible retaliation.

Moreover, the estimation of the Centre for American Progress should be a wake-up call for Trump's administration that it would result in a tax increase of $3,900 for a middle-income family, thus middle-class Americans are in the line of fire after the imposition of 10% tariffs on Chinese goods. It is expected that income and resource distribution will be further tilted towards the rich, which will widen the wealth and income gap in the US.

The latest report of the National Retail Federation warns that a universal 10-20% tariff on imports from all foreign countries and an additional 60-100% tariff on imports specifically from China could cost Americans $78 billion in annual spending power. Ultimately, low-income families will be worse off by tariff hikes than the richer ones.

It seems that extra tariffs will not help revive the US manufacturing industry. The US economy, particularly its manufacturing industry that imports intermediate products in large quantities, is propelled by and dependent on global value chains. More tariffs will only increase their production costs and reduce their competitiveness. So, the US importers have strictly opposed swelling tariffs.

Research by Moody's shows that the trade war with China caused the loss of 300,000 American jobs between July 2018 and August 2019. The Tax Foundation estimates that new tariffs will shrink US GDP by at least 0.8% and cost 684,000 full-time jobs.

"Trump's high tariff syndrome would backfire, subduing capital flows, reducing investments, discouraging joint ventures and development of green technologies (solar, wind, lithium batteries and hydrogen power generation). It would not help US firms compete well with foreigners, but will largely shut down international capital movements. Thus, healthy competition and cooperation between the US and China should be the way forward," Khan said.

The writer is a staff correspondent