Trump Shouldn’t Do Anything To Change US-China Trade Policy

22-Dec-2016 Intellasia | Forbes | 6:00 AM Print This Post

Even though the US stock market has been bullish in the wake of the US presidential election, there is uncertainty in the air surrounding President-Elect Donald Trump’s relations with China, and anxiety regarding his potential trade policies with the country. The outcomes of Trump’s campaign-trail trade policies would be damaging to both the Chinese and American economies, but if his policies are moderated, the impact may be far lower than anticipated. During Trump’s presidency, here are the three general tacks he can take:

Keep things the same.

Engage in trade negotiations to equalise tariffs between the US and China.

Impose tariffs of up to 45 percent on Chinese imports as promised on the campaign trail.

Option #1

In the first scenario, Trump wouldn’t do anything to alter the current trading arrangements between the US and China and leave tariffs as is. At present, US tariffs on Chinese goods amount to 2.5 percent for agricultural products and 2.9 percent for nonagricultural products, while Chinese tariffs on US goods sold in China amount to 9.7 percent for agricultural products and 5 percent for nonagricultural products.

This would allow China to continue on its trajectory of lowering tariffs on American goods, which it has been doing at a steady pace since its accession to the World Trade Organisation in 2001 (tariffs were on average 14.1 percent then according to World Bank data).

Neither American consumers nor American producers would experience any change.

Option #2

The second option is to start trade talks to equalise tariffs between the US and China. This may entail a bilateral free trade agreement, which analysts have been calling for, for years. Although they normally base the case for such an agreement on lowering tariffs between the two nations, a case can also be made for equalising tariffs.

The US could raise its tariffs on Chinese goods while China lowers its tariffs on American goods. While this would not be in alignment with common practice of treating developing and developed countries differently, it may appease Trump and his supporters and appeal to American exporters. Goods imported from China would probably become marginally more expensive for American consumers, but not greatly so.

Option #3

The third option is to impose tariffs on Chinese imports of up to 45 percent, as Trump touted while campaigning.

US imports from China amounted to $482 billion in 2015 and $380 billion as of October 2016. One area where China has a near-monopoly is laptops and electronics, providing Americans with more than 90 percent of these imports. If China were to retaliate with its own tariffs-as expected-this would make it difficult for Americans to switch to other suppliers, and raise prices for these already-expensive products as tariffs are most likely to be passed on to the consumer. And this is just one example.

Meanwhile, US exports to China currently amount to $116 billion, but are expected to rise as China endeavors to transform itself into a consumption-based economy. With retaliatory tariffs in place, US exporters would suffer future profits as Chinese shoppers become accustomed to purchasing cheaper imports from other countries. This would bar American firms from a unique opportunity to enter China’s markets at a critical time. Furthermore, China is currently the second-largest agricultural export market, and dampening exports in this area would hurt American farmers, especially soybean farmers.

Which option is best?

Clearly, the third and most radical option would harm both American producers and consumers. Sure, American producers would face less domestic competition where American and Chinese production does overlap in a handful of industries, but would lose a large and growing source of demand overseas. American consumers would face higher prices without gaining anything from the policy. The US would also be in gross violation of the World Trade Organisation (WTO) guidelines which prevent nations from raising tariffs extensively on other nations.

The second policy may make sense, but would probably take years to negotiate (as experts have noted) for relatively small gains that are already being made anyway as China reduces its tariffs over time. The agreement would have to be approved by the WTO, which is unlikely to view the US’s action of raising tariffs against China in a positive light. Raising tariffs is anathema according to WTO policy and is rarely done without compensating reductions in tariffs in other categories. A bilateral negotiated agreement between the two nations may increase the likelihood of passage, but nothing is guaranteed.

The first policy – embracing the status quo – would keep prices low for American consumers and provide American exporters with enough space to enter Chinese markets as consumer demand increases. After all, Chinese consumer spending is projected to be 28 trillion RMB by 2020, about $4 trillion. This policy keeps transactions costs of changing the trade regime low and continues to promise lower Chinese tariffs down the line as the nation gradually opens up. It also avoids nasty trade conflicts between China and the United States and long-running trade negotiations.

Jobs aren’t coming back no matter trade policy

Many make the case that raising tariffs on China will bring jobs back home-but none of these policies will do that. As I (and others) have noted, that ship has sailed. If producers decide they want to avoid manufacturing abroad to avoid increased tariffs coming into the US, they may bring production processes back home, automating them along the way to avoid paying higher labour costs. This won’t create jobs.

Even manufacturers in China, facing higher labour costs, are automating or moving to cheaper Asian nations like Vietnam.

Rather than starting a trade war with China, the US should be focused on creating new jobs in sectors that cater to American and Chinese demand. Growing industries in both countries include healthcare and wellness, smartphone software, green technology and e-commerce. Creating government policies that are conducive their development would be a better use of time and money than playing a lose-lose game over tariffs with China.


Category: China

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