How China Wins the Trade War
By Mary E. Lovely
Ms. Lovely is a professor of economics and an expert on trade with China.
Aug. 8, 2018
To inflict more pain on China, the Trump administration last week raised the ante in its trade war. It now promises that the next round of tariffs, on $200 billion in imports from China, will be 25 percent instead of the 10 percent announced earlier. President Trump exhorts his supporters that tariffs “mean jobs and great wealth.”
If jobs and wealth are the metric for “winning the trade war,” China, not America, will emerge the victor. China will win not because of one-party rule, although it certainly helps President Xi Jinping weather difficulties caused by trade tensions. Rather, China will win because it is playing this game more skillfully. The tariffs imposed by the United States will mostly be paid by American companies and consumers, while China is retaliating with moves that soften the blow for companies in China, including those that are foreign-owned.
To “win” a trade war on these terms, the United States would have to impose tariffs that somehow hurt the Chinese economy so badly that its leaders improve their treatment of American intellectual property, a longtime demand by American trade negotiators. The health of China’s economy depends on exporting to the United States, so, the thinking goes, the Chinese government will capitulate to American demands.
This strategy is certain to backfire.
First, about 60 percent of China’s exports to the United States are produced at factories owned by non-Chinese companies. Many of them produce customized inputs for American manufacturers, such as computer routers, LED fixtures and boat motors. That means the tariffs imposed by the Trump administration that are directed at China actually affect many American (and European) companies that own factories in China.
These companies cannot immediately respond to tariffs by quickly moving their operations out of China. Instead, they will absorb the import tax or pass it along to American consumers in the form of higher prices. This is already happening: a 20 percent tariff on washing machines imposed in February was followed by a 16.4 percent spike in consumer prices for these products. So most of the revenue raised by the tariffs is coming out of the pockets of American consumers, not Chinese companies.
Reduced American demand for Chinese products does hurt China. American merchandise imports account for about 3 percent of Chinese manufacturing revenue. That’s a large enough share for tariffs to do a bit of damage, but certainly not catastrophic.
Moreover, much of what the United States imports from China contains value created in other locations, including America. Much of the value in an iPhone imported from China, for example, includes displays from South Korea, chips from Japan and design and programming from America. So each dollar of sales lost by a Chinese company actually has a less-than-$1 impact on the Chinese economy. In computers and electronics, which account for the largest share of China’s exports to the United States, the Chinese value added in each dollar of imports is about 50 cents. Consequently, the negative effect of tariffs on Chinese manufacturing is unlikely to be large enough to have much of an impact on China’s trade practices.
As the trade war escalates, China’s leadership appears to have deepened its commitment to international supply chains. This is the opposite of the Trump administration, which seems intent on isolating American manufacturers.
For example, in its first round of retaliatory tariffs, China avoided hitting the imports that feed its foreign-owned factories. That helps cushion Chinese manufacturers and foreign investors from the impact of the trade war. In late June, Beijing made it easier for foreign investors to enter banking, agriculture and automotive and heavy industries. After further tariffs were announced in late July, China restated its intention to “further open up its economy.” Tesla recently became the first foreign automaker in China to get approval to operate without a local partner, with a deal for a wholly owned factory in Shanghai to produce electronic vehicles. These moves send a powerful signal to investors that China remains committed to its international partners, even in the middle of a trade war.
To be sure, China still engages in policies that undermine fairness in the world trading system. China has failed, for example, to meet commitments to open specific sectors to foreign participation. It also continues to subsidize heavy industries that flood markets in other countries, depressing prices and causing job losses. But the tariffs imposed by Mr. Trump fail to address these challenges.
Instead, when the next round of tariffs hits, American households will face higher prices on computers, clothing and thousands of other products. China, not the United States, will improve its standing in the world as a place to make and build the future.
Mary E. Lovely is a professor of economics at Syracuse University and a fellow at the Peterson Institute for International Economics.
https://www.nytimes.com/2018/08/08/opinion/trump-tariffs-china-trade-war-who-will-win.html
By Mary E. Lovely
Ms. Lovely is a professor of economics and an expert on trade with China.
Aug. 8, 2018
To inflict more pain on China, the Trump administration last week raised the ante in its trade war. It now promises that the next round of tariffs, on $200 billion in imports from China, will be 25 percent instead of the 10 percent announced earlier. President Trump exhorts his supporters that tariffs “mean jobs and great wealth.”
If jobs and wealth are the metric for “winning the trade war,” China, not America, will emerge the victor. China will win not because of one-party rule, although it certainly helps President Xi Jinping weather difficulties caused by trade tensions. Rather, China will win because it is playing this game more skillfully. The tariffs imposed by the United States will mostly be paid by American companies and consumers, while China is retaliating with moves that soften the blow for companies in China, including those that are foreign-owned.
To “win” a trade war on these terms, the United States would have to impose tariffs that somehow hurt the Chinese economy so badly that its leaders improve their treatment of American intellectual property, a longtime demand by American trade negotiators. The health of China’s economy depends on exporting to the United States, so, the thinking goes, the Chinese government will capitulate to American demands.
This strategy is certain to backfire.
First, about 60 percent of China’s exports to the United States are produced at factories owned by non-Chinese companies. Many of them produce customized inputs for American manufacturers, such as computer routers, LED fixtures and boat motors. That means the tariffs imposed by the Trump administration that are directed at China actually affect many American (and European) companies that own factories in China.
These companies cannot immediately respond to tariffs by quickly moving their operations out of China. Instead, they will absorb the import tax or pass it along to American consumers in the form of higher prices. This is already happening: a 20 percent tariff on washing machines imposed in February was followed by a 16.4 percent spike in consumer prices for these products. So most of the revenue raised by the tariffs is coming out of the pockets of American consumers, not Chinese companies.
Reduced American demand for Chinese products does hurt China. American merchandise imports account for about 3 percent of Chinese manufacturing revenue. That’s a large enough share for tariffs to do a bit of damage, but certainly not catastrophic.
Moreover, much of what the United States imports from China contains value created in other locations, including America. Much of the value in an iPhone imported from China, for example, includes displays from South Korea, chips from Japan and design and programming from America. So each dollar of sales lost by a Chinese company actually has a less-than-$1 impact on the Chinese economy. In computers and electronics, which account for the largest share of China’s exports to the United States, the Chinese value added in each dollar of imports is about 50 cents. Consequently, the negative effect of tariffs on Chinese manufacturing is unlikely to be large enough to have much of an impact on China’s trade practices.
As the trade war escalates, China’s leadership appears to have deepened its commitment to international supply chains. This is the opposite of the Trump administration, which seems intent on isolating American manufacturers.
For example, in its first round of retaliatory tariffs, China avoided hitting the imports that feed its foreign-owned factories. That helps cushion Chinese manufacturers and foreign investors from the impact of the trade war. In late June, Beijing made it easier for foreign investors to enter banking, agriculture and automotive and heavy industries. After further tariffs were announced in late July, China restated its intention to “further open up its economy.” Tesla recently became the first foreign automaker in China to get approval to operate without a local partner, with a deal for a wholly owned factory in Shanghai to produce electronic vehicles. These moves send a powerful signal to investors that China remains committed to its international partners, even in the middle of a trade war.
To be sure, China still engages in policies that undermine fairness in the world trading system. China has failed, for example, to meet commitments to open specific sectors to foreign participation. It also continues to subsidize heavy industries that flood markets in other countries, depressing prices and causing job losses. But the tariffs imposed by Mr. Trump fail to address these challenges.
Instead, when the next round of tariffs hits, American households will face higher prices on computers, clothing and thousands of other products. China, not the United States, will improve its standing in the world as a place to make and build the future.
Mary E. Lovely is a professor of economics at Syracuse University and a fellow at the Peterson Institute for International Economics.
https://www.nytimes.com/2018/08/08/opinion/trump-tariffs-china-trade-war-who-will-win.html
