On the first of March, Donald Trump announced a global 25 percent tariff on steel imports and 10 percent on aluminium for an unlimited duration.

 

He then exempted from such tariffs the two neighbours, Canada and Mexico, which are the source of a quarter of all US steel imports, and other US allies such as Argentina, Brazil, the EU and South Korea.

The exemptions, however, have a limited duration as the US president hopes to secure a “fair” NAFTA deal and the commitment to spend more on defence from other NATO members. The intended target of the two global tariffs was clearly China, which has a large trade surplus with the US.

However, the damage to the Chinese economy should be limited, as it has only a two percent share of the US steel imports. As a result, two weeks ago, Donald Trump announced a 25 percent levy on up to $60bn of annual imports from China. These targeted new tariffs will probably reduce the large trade deficit with China, but, ultimately, may also damage the US economy.
The US president believes that “trade wars are good and easy to win” as the US has a large trade deficit with China.

‘trade wars are good and easy to win’

In principle he is right; “a trade war is something that deficit countries with diversified economies should win and surplus countries always lose”, said Michael Pettis, finance professor at Peking University’s Guanghua School of Management.

However, a basic economic principle states that the balance between exports and imports corresponds to the difference between savings and investment. A tariff on steel will reduce steel imports, but if the saving-investment balance cannot adjust accordingly, other imports will rise, leaving the overall trade balance unchanged.

To narrow the trading gap, the US should have more savings relative to its level of investment. Fiscal policies designed to increase US savings would help, although the recent tax cuts and spending increases push in the opposite direction.

Alternatively, the US could impose capital controls restricting the ability of China to purchase US Treasuries and other dollar assets. In either way, the US president would minimise the difference between saving and investment and improve the trade balance with China.

Apart from reducing the US trade deficit, the White-House has a broader objective, which involves the disruption of a high-level Chinese strategy, called “Made in China 2025”.

Such strategy aims to make a number of Chinese companies world leaders in sectors such as robotics, semiconductors, aviation and computing. To do so, Beijing supports the acquisition of foreign companies or overseas technologies either owning shares, or, providing loans with policy banks. Clearly, the planned US tariffs are also meant to hit China in response to these unfair technology and intellectual practices.

‘the Chinese government announced retaliatory tariffs on about $3bn of annual imports from the US’

Two weeks ago, the Chinese government announced retaliatory tariffs on about $3bn of annual imports from the US. The plan involves additional tariffs on 128 US products that are unlikely to hurt domestic consumers such as nuts, pork or wine.

Beijing has, for now, decided to hold fire on imposing duties on US soybean imports, which were worth almost $14bn last year. The new tariffs were in retaliation for US steel and aluminium tariffs, raising the prospect of an even tougher response in the future. Wei Li, senior China economist at Standard Chartered in Shanghai, estimates that a broad-based trade war would cost the US 0.2 percent to 0.9 percent of GDP.

In addition, Beijing may disrupt US businesses that have operation in China through regulatory harassment. “They will not certify your product, they look at your taxes, maybe they even start looking at visas” said William Zarit, chairman of the American Chamber of Commerce in Beijing.
In conclusion, the US president is imposing tariffs on Chinese products for two main reasons;

 

1. He wants to reduce the US trade deficit with China. However, he should increase US savings relative to investment to effectively improve the trade balance rather than focusing on specific products.

2. To hit China in response to unfair technology and intellectual practices.
As a response to the US steel and aluminium tariffs, Beijing announced duties on 128 US products raising the prospect of a trade war. In such scenario, the US should be the “winner”, but the losses to the US economy may be higher than expected; apart from imposing tariffs on US products, Beijing may also disrupt US businesses that have operation in China through regulatory harassment.





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