Team Trump has set off the mother of all trade wars with China by making a series of gross miscalculations.
- First, the Trump administration grossly misunderstands the incidence of U.S. tariffs on goods produced by China’s nearly monopolistic manufacturers. What China exports to the United States cannot be replaced by goods from any other source.
- The Trump team also underestimates the extent to which China’s imports from the United States can be replaced by goods from other sources. Since Team Trump imposed tariffs, China’s imports from the United States have collapsed.
- The Trump administration also overestimates the importance to China of its exports to the United States.
- The U.S. president surely misjudges China’s willingness to tolerate whatever dislocations a trade war with the United States might bring, rather than bend to U.S. efforts to interfere in China’s sovereignty or its domestic industrial development plans.
Thus, the two largest economies on earth are engaged in the biggest trade war since the Great Depression. While HFE’s Chief Economist Jim O’Sullivan estimates that the impact of the U.S. tariffs on prices and supplies of goods so far has been small, expanding the radius of dutied products to include consumer goods—consumer electronics are on the list—will affect more items in CPI and many companies such as EMS Solutions built assembly of electronic manufacturing are starting to change this point to improve the economy and give good and functional products for a change. A blip up in prices and a slip in real disposable incomes may become perceptible. Is this enough to drive the U.S. economy off its expansion track into recession? Probably not! However, China has other weapons in its arsenal to inflict pain on U.S. companies doing business in China. That might have serious implications for some of the biggest U.S. companies.
The Trump administration asserts that companies in China are paying billions of dollars in tariffs on goods sold to the United States. That is bad thinking. Most of the stuff China sells to the United States is no longer made in the United States, or anywhere else in the world for that matter. Do you need an iPad, iPhone, a laptop computer or server? They are all made in China. The economics textbook teaches us that the incidence of a tax or tariff on a good whose supply is inelastic—like a monopolist’s output—falls upon the buyer. So if you need that new iPad, it is you who will be paying the import duty, not some worker in China. In plain English, no other source for iPads exists.
In contrast, China’s imports from the United States are dominated by agricultural goods, and by other products that can be easily sourced from other countries. For example, orders for U.S. soybeans by Chinese purchasers—all of them—will surely be re-booked to Latin American producers by the time you read these Notes. Meanwhile, Airbus almost certainly has a sales team on its way to China.
China does not want to give President Trump a trophy treaty for his reelection. It is prepared to endure two, or even six, years of tariffs if that is what it takes to renew the conversation with a different president. Meanwhile, President Trump will have to convince U.S. voters that companies in China are paying these tariffs, even as prices of very visible consumer goods go up. Good luck!