2 min read.Updated: 12 May 2019, 11:53 PM ISTVivek Kaul
On 10 May, the US increased tariffs on Chinese imports worth $200 billion from 10% to 25%. Negotiations are on between the two countries to sort out the issue
What is the US-China trade war about?
In 2018, the US imported goods worth $539.5 billion from China. It exported goods worth just $120.3 billion during the same period. Hence, the US’s trade deficit with China was $419.2 billion. US President Donald Trump wants to lower this deficit by imposing tariffs, making Chinese imports expensive. This, he hopes, will prompt US citizens to buy products that are made in their country. However, no one is forcing US companies to manufacture goods in China. At the same time, no one is forcing Americans to buy goods made in China. They do so because they see value for money in it.
Who will bear the cost of higher tariffs?
If Chinese products continue to be more value for money than US goods after higher tariffs, they will become costlier. If US products work out better than Chinese ones after tariffs, they will turn costlier than what the latter are at present. US consumers will bear the cost in both cases. Also, higher prices of imported goods will translate into greater inflation for the US as a whole. Trump had hoped that once Americans start buying more US goods, more jobs will be created as firms will expand trying to cater to higher demand. But with higher prices, Americans may reduce consumption. So the firms may not expand or create jobs.
Is there more to this issue?
The US is considering a move to impose a tariff of 25% on a further $325 billion worth of Chinese goods. This will more or less put all imports from China under a stringent tariff regime.
What can China do about it?
China has already imposed tariffs on US imports worth $110 billion. Given that its imports from the US were $120.3 billion in 2018, there isn’t much it can do on expanding the tariff front. It has imposed 25% tariffs on agricultural imports from the US. This has hampered soybean exports from the US. Experts say this tariff may be raised, even doubled. The Chinese can also make it tough for US firms operating on its soil. In the last four years, 8% of Boeing orders came from China. Future orders could move to some other firm.
How will this impact the global economy?
China uses the dollars it earns by exporting goods to the US to buy goods from around the world. Chinese exports to the US fell by 18.5% to $31.2 billion in March this year. If this trend continues, it will lead to a problem for China and its major trading partners, as the country will not earn enough dollars to pay for its imports. Hence, if the US-China trade war continues, it won’t be good news for anyone.
Vivek Kaul is an economist and the author of the Easy Money trilogy.