[SCMP Column] Tariff war

August 25, 2018

As the US’s trade sanctions against China at last take effect, and “trade war” begins in earnest, it is timely to take an “audit” of the “America First” trade war as it focuses on China.

What are the practical impacts so far? How likely is the strategy to achieve declared aims? And what are likely to be unexpected consequences?

First, on practical impacts so far. In dollar terms they are quite small, which is probably as intended ahead of critically-important Senate and House of Representative elections in November. If negative effects don’t start to be felt until after the Mid-term elections, so much the better.

Tariffs on US$50bn a year of Chinese exports means the policy will in practice potentially impact imports worth about US$4bn a month. If importers go ahead and import anyway, imported goods from China will cost up to 25 per cent more. Pain may be acute in certain areas, but we need to remember that US goods imports amount to about US$200bn a month. So tariff impacts inside the US are likely to be modest.

So too inside China – first, because more than half of the goods targeted for tariffs are exports from US and other foreign-invested companies from places like Hong Kong and Taiwan, and second because even where the export value of items is high, very little of this export value is being captured inside China. When the value of an export from China is broken down, at the end of a long production chain that might embrace more than 10 economies, discomfort will be shared across all economies in the chain.

So at this stage, practical impacts are small, but provide dramatic publicity in important US elections. Donald Trump’s core can praise him for sticking to campaign pledges, and for “putting America first”.

The serious and perhaps long-term harm done to the US reputation as a reliable or trustworthy trading partner, and as a champion of rules-based international trade, cannot yet be measured.

Second, how effectively will the tariff strategy achieve defined aims? On the surface, Trump’s aim is simply to reduce China’s exports to the US, to raise US exports to China, and to “bring jobs home”. The more economically literate in the US administration are attacking Chinese pressure on US companies to transfer technology, intellectual property theft, and unfair state-backed support inside the Chinese economy for state-owned companies or companies operating in specific sensitive sectors.

As for Trump’s simple agenda, the trade expert consensus is that his strategy is wildly off-target. The only jobs the strategy would “bring home” would be low-pay, low-value-adding jobs that have been shifted offshore by US companies for very good reason. Bringing them home to an economy that is growing strongly and with full employment would be powerfully inflationary, and harmful to the international competitiveness of thousands of US companies.

The second agenda – to tackle unfair competition inside China’s economy – is a reasonable one, for which a tariff war is irrelevant. Guns are being pointed in the wrong direction, and ill-will is being created that can only make it harder to win reforms inside the China economy.

Third, whatever small gains are achieved in goods exports will come at the expense of much bigger losses elsewhere. US goods exports to China amount to US$150bn, but sales inside China by US companies now amount to more than US$220bn a year. Future prospects for this much-more-important business is being put gratuitously in danger.

Also, by ignoring services trade, the tariff war on goods is putting hundreds of billions of dollars of critically-important business inside the US in jeopardy. The US has a handsome US$300bn surplus in services trade, and massive upside potential – in particular with China. But the present strategy is putting this at risk.

For example, look where these services exports come from. Over US$290bn if services exports (40 per cent of total services exports) came from tourism - 76m foreign tourists visited the US in 2016, underpinning close to 10m jobs. China is today the source of more international travellers than any other country – more than 150m last year – and this total is growing at more than 5m a year. In 2016 just 3m of these travellers went to the US – but they spent US$33bn, by far the highest per capita spending of any country worldwide according to the Germany-based China Outbound Research Institute.

At this rate, attracting an extra 1m Chinese tourists would lift US tourism “exports” by US$11bn a year. Add 10m over the coming decade – not an unreasonable target – and this amounts to services “exports” worth an extra US$110bn a year, adding literally millions of new jobs in the US. By poisoning relations with China, Trump’s trade war is putting much of this potential at risk: imagine how easy it is for China suddenly to make it harder to get US visas.

It is intriguing that Trump obsesses so keenly on US goods exports to China worth US$150bn a year, while wholly neglecting the upside potential of tourism and other services worth twice as much.

Trump’s “defence” would probably be that the structural imbalance in the US trade relationship with China is so serious that short-term pain must be a price worth paying. His administration would argue that present tactics may be regrettable, but are necessary for the long term.

Sadly, that is not the view from outside the US. Trump has undermined – perhaps permanently – America’s reputation as trustworthy trade partner and a champion of rules-based trade. His assault on the multilateral trading system is likely to be firmly rebuffed. The effort to persuade Xi Jinping to back away from his “Made in China 2025” industrial policy will fail, as will the attempt to slow Chinese efforts to build a more high-tech, high-value-adding economy. China will probably liberalise, more slowly than we would like, but in a multilateral framework, and not bowing to bilateral US pressure.

As Henry Kissinger, perhaps the US’s foremost diplomat, political scientist and statesman over the past half century, noted just a couple of weeks ago: “We are in a very, very grave period.”
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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