Home Business Prepare To Pay More As Tariffs On Chinese Goods Begin

Prepare To Pay More As Tariffs On Chinese Goods Begin

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President Trump announced September 17 that the US would broaden tariffs on Chinese imports: Beginning September 24, the US would begin charging US importers a 10 percent incremental tariff on purchases of $200 billion in Chinese goods. Unlike earlier tariffs which principally targeted industrial products, this round of tariffs will include many types of consumer goods – since the tariffs broaden the share of Chinese imports subject to tariffs to roughly 50 percent, it would be impossible for them not to include consumer goods. President Trump further warned that the tariff rate would increase to 25 percent on January first if China does not satisfy US demands to alter economic and trade policies and reduce China’s trade surplus with the United States, and that the US would further broaden tariffs to hit all Chinese goods imports if China retaliates against US escalation. The tariffs are an expansion of the 25 percent tariffs already in effect on $50 billion in Chinese goods imports, as well as US tariffs on smaller amounts of Chinese steel and aluminum products.

China, for its part, warned the  United States that it will retaliate with tariffs of its own on $60 billion of US exports to China. Communist Party General Secretary Xi Jinping hinted at unspecific non-tariff retaliation as well, saying China would not only play defense in a trade war. On top of tariffs, China’s propaganda organs could encourage Chinese consumers and businesses to boycott American businesses operating in China. Its government could also permit Chinese businesses to violate sanctions against Iran, North Korea, and other persons and entities sanctioned by the US government, or cease cooperation on protection of US intellectual property and trade secrets.

The latest tariffs will make a meaningful albeit one-off contribution to US inflation. If trade patterns held unchanged, the 10 percent tariffs on $200 billion of Chinese imports would increase US prices $20 billion, equivalent to about 0.15 percent of the roughly $14 trillion dollars in annual US consumer spending. If all of that price increase were realized in a single quarter, it would add about 0.5 percentage points to the annualized increase in consumer prices. But of course, trade patterns will change, and so the increase in US prices will be less than this. American importers will substitute non-Chinese products for some of the tariffed imports, make offsetting cuts to other operating costs, or allow profit margins to shrink if they think their customers are unable or unwilling to pay higher prices. US demand for Chinese imports will fall as their price rises and reduces real US purchasing power. And Chinese exporters will lower prices on sales to the US to absorb some of the pain and preserve market share.

Tariffs will have other repercussions. In addition to foreign retaliation against US imports, tariffs make the US a less attractive locale for global supply chains. This effect already visible in plummeting foreign direct investment in the United States, which fell about 40 percent in 2017 from its $470 billion average in 2015-2016 to about $290 billion, and fell another quarter to about $210 billion annualized in the first quarter of 2018 – a cumulative drop of over half. FDI is a canary in the coalmine warning that global companies, the channel spreading the most advanced technological and organizational innovations through the global economy, are looking elsewhere for their long-term growth.

Faith Based Events

The US’s unilateral approach to trade policy also means the US is not at the table negotiating multilateral trade agreements. When the US withdrew from the Trans Pacific Partnership, its other members removed provisions especially favorable to US businesses, like those protecting IP-intensive pharmaceuticals, media products, and telecom services, before ratifying the modified agreement as the Comprehensive Progressive Trans Pacific Partnership.

The tariffs will benefit US businesses that compete against Chinese imports. These businesses have a good year ahead of them. But the tailwinds to protected industries will be less than the headwinds to the rest of the economy.

Tariffs that have been enacted will likely persist for some time. Contrary to some perceptions, Chinese exports to the United States are not a large enough part of the Chinese economy, nor is the Chinese economy weak enough, for China to be forced into fast concessions on trade and economic policy. Even counting exports routed through global trade hub Hong Kong, Chinese sales to the US are less than 4 percent of GDP – down from double digits prior to the Great Recession and a sign of how China has diversified its economy away from dependence on the US. Chinese economic data in mid-2018 are cool, but more because of tight domestic credit policy (inflation adjusted money supply growth at its slowest since at least the 1990s) than because of trade headwinds. Chinese interbank interest rates fell sharply in the third quarter of 2018, a sign that bank lending will stabilize and accelerate into 2019 to offset the drag from tariffs.

While Chinese sales to the US are a larger share of Chinese GDP than US sales in the other direction, the US political system is much more sensitive to the economic repercussions of trade friction than China’s. A democracy is more likely to react to public pressure about trade policy than an authoritarian state that spends more on internal security than on external-facing defense. China’s legislature cancelled term limits on the Presidency so Xi Jinping could rule for life. He will probably try to play the long game.

Tariffs have cross-cutting implications for US monetary policy. They will increase inflation, but this will be a one-time impact; tariffs also increase downside risks to growth in the medium- to long-term. The Federal Reserve will closely monitor tariffs’ effects on inflation, growth, and employment, but will only alter the course of monetary policy if effects are large and persistent.


Bill Adams

Bill Adams, PNC’s Senior International Economist,


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