China and the U.S. are firing warning shots in what could escalate to a full-on trade war.
First, the U.S. announced tariffs on steel and aluminum imports, including from China. China then retaliated with levies on American products, including pork. The Trump administration then proposed $50 billion worth of measures against more than 1,000 Chinese-made items, including the components of consumer-electronic goods like flat-screen televisions. Hours later Beijing announced proposed tariffs worth an equal amount of money on more than 100 American products ranging from soybeans to cars and whiskey.
“We’re in a tit-for-tat dynamic where both sides have taken actions that are outside the normal procedures of international commerce,” Scott Kennedy, an expert on Chinese business and its economy at the Center for Strategic and International Studies in Washington, told me.
What this will mean in effect is still up for negotiation—the two sides are so far mainly at the threatening stage, and the latest rounds of proposed tariffs are just that: proposals, not yet reality. Either or both sides may well decide to back down, if they can reach accommodation on things like American complaints about Chinese intellectual-property theft—or if domestic political pressure forces them. But the basic dynamic is straightforward: Tariffs make imported things more expensive.
Take TVs. Many flat-panel TV screens and their components are produced in China, where the labor is cheaper than in the United States. So what many Americans shop for over Thanksgiving weekend is intimately bound up in the global trading system. The cost of a typical flat-screen TV ranges from about $650 to more than $1,500—which reflects the cost of the component parts as well as research and development, plus markup. But imagine now that the component parts are suddenly 25 percent more expensive, because the tariff raises the cost of importing them. At the high end, that could push the cost of a television up toward $2,000. (Of course, the companies that make these TV sets might decide to reduce their profits in order to keep the prices constant, but don't bet on it.)
But it’s also significant that this is a relatively high-end good; the proposed U.S. tariffs focus on products Americans don’t import a lot of, which may minimize how widespread those tariffs’ impact is. A Bloomberg analysis noted that of the 1,300 products from China the U.S. has proposed targeting, only 70 were among the top 500 products the U.S. imported last year. “With specialty inputs and chemicals on the list, [the] effect may be confined to high-end manufacturing,” Caitin Webber, an intelligence analyst at Bloomberg, said on Twitter.
More broadly, if some Chinese-made products become more expensive for American consumers, it may seem like a blessing for U.S. manufacturers competing to sell the same types of products. But consumers, faced with a choice of two expensive goods—one made in China and the other in the U.S.—may simply buy neither. (Maybe you don’t really need a new flat-screen TV.) This would hurt the very same American companies Trump says he is trying to protect. They may be forced to lay off their workers. These laid-off workers themselves are consumers who, without an income, will buy less—leading to a spiral that could end with a recession.
For his part, President Trump, who was critical of China’s trade practices well before he entered the White House, appeared unperturbed about the possibility of a trade war. He asserted Wednesday the annual $500 billion U.S. trade deficit with China means “you can’t lose,” and that intellectual-property theft was costing the U.S. another $300 billion.
Although the deficit figures are indisputable, the merit of the president’s argument is not. (Many historians point out that trade wars aren’t good or particularly easy to win.) Kennedy said there is a broad consensus that China’s economic and trade practices are unfair “and because of China’s scale and size … this has major consequences.”
“These are genuinely justifiable concerns— and China deserves to be punished for them,” he said. “It’s just unclear whether the punishment ought to come through these unilateral measures that the Trump administration has taken or through … other ways to further constrain China so that they would have changed willingly. That’s what the debate is about.”
At the moment though, American consumers needn’t worry, Kennedy said, because “the products that the Americans have put penalties on and those that the Chinese have responded with aren’t primarily products that American consumers are going to miss on their shelves.”
But, he added, the trade threats initially resulted in a broad decline in U.S —and global—stock markets. “The primary way American consumers are going to feel pain in the short terms is in their portfolios,” Kennedy said. “So, it’ll affect folks’ savings, and that, in turn, affects their discretionary spending. So it’s that indirect effect that in the short term has the bigger effect.”
The U.S. and China need each other. Trade between the two countries was worth $648.5 billion in 2016. And the trade dispute could ultimately affect companies like Apple, which makes its iPhone in China. Tech companies not only need China to make their products, but also China’s massive consumer market to sell them. “Apple can’t build an iPhone without China, but China can build hundreds of millions of devices approaching the iPhone’s quality without Apple’s help. … If China were merely a producer, it could be substituted away from over a period of time,” Vlad Savov wrote in the Verge in November 2016. “But China also devours phones at a rate that overshadows every other region.”
Then there are China’s own tariffs on products it imports from the United States—which, by making those goods more expensive to Chinese consumers, will hurt American producers trying to sell them. Several of the American sectors China is considering targeting disproportionately rely on Chinese consumers. This includes soybean farmers, the U.S. automaker GM, and Tesla. And the fact much of the effect will be felt in American states that voted for Trump is probably no coincidence.
Given how the country has been the engine of global economic growth in recent years, the economic effects are likely to be felt far beyond the U.S. and Chinese borders.“If this continues, it will hurt competitive business models, global supply chains, and hurt r&d because of the pinch on profitability,” Kennedy said. “That will hurt Americans in their job opportunities. It will affect our productivity [and] growth.”
He added: “Market distortions in China are now global distortions.”
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