Tariffs started in 1789 in the US as a means to increase the price of imports or penalize foreign countries from committing unfair trade regulations, such as subsidizing their exporters or even unfairly lowering prices of their products. Imposing tariffs results in fewer consumers willing to buy foreign goods and instead purchase domestic goods. After World War II tariffs fell out of favor due to a global trade expansion. The formation of the World Trade Organization and the initiation of trade deals in the US like North American Free Trade Agreement reduced tariffs or abolished them overall. Afterwards, tariffs made a comeback against globalization when richer countries such as the US moved factories to China and other low-wage countries then transported them back to their wealthy homelands while paying low tariffs or none at all.
Trump amended trade agreements by desiring to crash down China and other countries in order to decrease US trade deficits in which he blames the unjust trade policies. By imposing these tariffs he is beginning to turn these desires into action.
Tariffs have historically served as a role in the nations foreign trade policy and also as a source of federal income. As of today, tariffs imposed by Trump’s Administration have a slightly different purpose that targets one of the largest economically advanced countries such as China. Before discussing these purposes, it is important to know that China and the US have a long history together. Since 1949, U.S.-China relations have progressed from tense deadlocks to a complex fusion of escalating diplomacy, and increasing international competition. In 2017 after Trump became president, US Secretary Rex Tillerson described the US-China relationship as “one built on non-confrontation, no conflict, mutual respect, and always searching for win-win solutions.” It wasn’t until 2018 that Trump had a new purpose to tariffs,?taking? aim at China’s theft of US intellectual property. The real reason behind these tariffs is to try to stop China from its unfair intellectual property theft, and the only country that is facing China about that matter is the United States. It believe that certain Chinese laws counteract property rights by driving foreign countries to enter joint ventures with Chinese firms. This allows their Chinese partners access and authorization to use the new and innovative technologies or even replicate them. In an attempt to end this the Trump administration stated that tariffs were necessary to prevent China’s theft to US intellectual property and also help decrease the US trade deficit with China.
Consequently China responded back to these allegations by stating that the US did not have enough evidence to accuse them of theft and therefore do not have legal authority to respond based on the World Trade Organization regulations. China also criticized the US of their export restrictions on high technology goods, their unfair status in the American economy, and irrational trade sanctions. In a meeting, a leading member of a key Chinese committee gives a strong warning to the Trump administration stating that: “China never wants a trade war with anybody, not to mention the U.S., who has been a long term strategic partner, but we also do not fear such a war.
However, a statement made by The White House declares that: “The goal of United States trade actions is not to harm China’s economy or start a trade war, but to get China to follow through on allowing fair competition and stop their unfair trade practices that have been hurting the American workers for years.
Since their consultation with the World Trade Organization, neither parties seem to be able to reach an agreement. Both countries have continued to respond by ongoing trade war activities. While China experienced a trade surplus, the United States was encountered by a trade deficit; causing the Trump Administration to take action by imposing imports.
The U.S. has imposed tariffs on a total of $250 billion worth of Chinese exports. In retaliation China has enacted tariffs on $110 billion of U.S. exports 2?.? These tariffs will likely raise prices in both China and the U.S. as imported goods will cost more due to the import tax. Also increased prices on imported goods allows domestically manufactured products to raise prices as well while still remaining competitive. This increase in prices will partially be transferred over to consumers who will end up paying more for the same products. Products affected by U.S. tariffs “rang[e] from rattan mats to burglar alarms to bicycles” ?,? however the products most heavily affected by the tariffs are “computers and computer parts, furniture, and tires” . Walmart, the biggest retailer in the U.S. ,? said the tariffs will “raise prices on consumers” in a letter to a U.S. trade representative ?.?
In response to the criticism, U.S. President Donald Trump claims the tariffs have had “no impact on [the U.S.] economy” 5?.? Despite Trump’s claims, many American businesses have been forced to make cuts due to the new tariffs resulting in large scale layoffs. A study by the Trade Partnership Group found that the U.S. tariffs on aluminum and steel alone could lead to a net total of over 400,000 americans losing their jobs 6?.? Due to China’s prominence in electronics manufacturing, many U.S. electronics retailers and manufacturers have experienced the biggest impact from these tariffs. An example of this is the TV manufacturer Element Electronics which plan to “lay off 127 workers from [their] South Carolina factory” due to “the new tariffs .
Recently and unexpectedly imposed on many goods imported from China” 6?.? The price increase on electronics parts as a result of the tariffs are forcing companies like Element Electronics to make cuts that affect not just the businesses but society as a whole. Increased prices can lead to lower spending by consumers and layoffs affect entire households’ income.
The reason why U.S. tariffs with China have such a significant impact on American society is because of the fact that China is one of the main trading partners with the U.S. China is the primary source of imports for 23 states and is within the top three for 43 states 7?.? Figure 1, below, shows the main import trading partner for each state.
Figure 1: Biggest Import Trading Partner Per State 7?
The states most affected by the U.S. tariffs on China will be those whose main source of imports are China.
The two-way tariffs not only affect U.S. society but that of China as well. In fact China is taking a larger hit economically due to the fact that around one quarter of Chinese exports go to the U.S. whereas only around 8% of U.S. exports go to China 8?.? It is estimated by the Standard and Charter bank of Hong Kong that if Trump continues with the plan to raise the tariffs to 25% on January 1st, China’s economic growth rate could experience a dip of 0.6% 8?.? The tariffs have also resulted in many losing their jobs in China due to firms moving “to Vietnam and Cambodia where they can both avoid Trump’s tariffs, and, significantly, pay lower wages than in China” 8?.? In addition, China’s retaliatory tariffs imposed upon the U.S. will affect Chinese shoppers by raising the prices of U.S. made products.
Overall it seems as though these tariffs have done little to help the people of China or the U.S. and have instead contributed to raising prices and causing widespread layoffs. There have been some advantages however, particularly for the U.S., in terms of increased revenue for the federal government. The U.S. treasury Department says that this year there has been a $5.4 billion increase “in the collection of customs and duties so far this fiscal year” 9?.? Yet this increase is nearly negligible relative to the overall U.S. budget and does little to help American citizens or deal with the growing budget deficit. The Americans who are receiving the greatest benefit from these tariffs are those working, or wishing to work in the primary metals industry. Within the past year, 7100 new jobs have been created by manufacturers focusing on primary metals due to the increased investment after these tariffs 9?.? Still, these new jobs only help a small proportion of the population compared to those affected by increasing prices or potential unemployment.
The? tariffs imposed on China by the U.S. government can clearly lead China to a decrease in industrial productivity, deceleration on GDP growth rate, and a currency instability
(3). Therefore, raw materials such as steel and aluminum will decrease in availability and manufacturing industries will halt their productions at a considerable rate. In a long-term analysis, the United States’ GDP is expected to decrease by approximately 0.12 percent, which accounts for nearly 30 billion US Dollars. In the case of China, the GDP is expected to plunge by 0.38 percent (94 billion USD) (5). This information suggests that the current tariffs will tend to decelerate China’s growth at an alarming rate and consequences that will affect the country’s political, economic, and social infrastructure. The tariffs can also fluctuate the currencies rates from both sides and ultimately affecting exporters’ way of doing business internationally. This can lead to lower profit and its subsequently decreased revenue.
From a political perspective, the impact can be more drastic to China’s government goals set for the year 2020 (4). If the generated revenue decreases, there will be no input to improve the country’s economy or to straighten the public sector. In the last decade, the Chinese Communist Party has promised to build a “moderately prosperous society in all respects” by 2020 (4). The Chinese government also stated to improve innovation, research, and human development in rural and regional areas; improving people’s quality of life and wellbeing. In order to achieve this goal, the Chinese government has to increase its GDP at a rate of 6.2 percent over the three remaining years. Also, there needs to be a creation of 11 million jobs by the end of 2018, equally distributed income growth, and a relatively efficient energy consumption to reduce waste and contaminants (4). Nevertheless, the imposed tariffs seem to put at risk this goal and according to Oxford Economics, the 6.5 percent GDP growth is considered ambitious for China. To conclude, the best possible solution for the Chinese government would be to revise its reforms for growth model and rationally adapt the infrastructure to support a model based on services.
In recent news, China is seeking possible solutions to stop the increasing number of tariffs imposed by the government of the United States of America in the first semester of 2018 (2). According to the White House announcements, the importations from China were set a 10 percent rate and the tax has irrationally increased to 25 percent. As a way to solve this issue, both governments are trying to open discussions to settle an agreement in order to enhance the trading conditions. So far, these discussions have taken place via telephone and the expectations for a future meeting are considered favorable. Although both countries are willing to find solutions, there is still a high degree of uncertainty about the possible outcome. In the same way, trade policy advisors have stated that the final decision to any trade would lie on president Trump’s personal judgment and that no other economic entity would be involved. At last, the purpose of this meeting would be to identify the main flaws that China may have and to restructure the trading system to avoid intellectual infringement from both sides (2).
The Trump administration’s economic policies are heavily centered around the notion to encourage protectionism within businesses in the United States. Donald Trump believes that in order to combat the overwhelming trade deficits the United States has with China, tariffs should be imposed on numerous imports, more specifically on the steel and aluminum industry. As businesses begin to adjust to the taxation on imported goods, manufacturers face three options where they either adjust and accept the added expense, raise up the prices of their goods in correlation to the cost of tariffs, or move their place of operation somewhere else. Donald Trump claims such tax will lead to consumers and local businesses opting for domestic industries as a cheaper and more convenient alternative, translating to an economic growth for American businesses and create more jobs for the American citizen. A study by Forbes, however, has reflected on the contrary, explaining that tariffs will just lead manufacturers to increase “their operational costs and putting pressure on profit margins”. As a result, businesses that relied on Chinese imported goods, which were much cheaper and economical than their american counterpart due to the lower cost in labor and more efficient operational cost in China, will have to purchase their needed steel or aluminium at a higher price from an American steel or aluminum manufacturer. This will negate the economic growth of businesses that use steel and aluminum as part of their operation, and only benefit a minority of the american steel and aluminum producing companies. As an unintended and unpredictable consequence, Trump’s policy disregards the effects the tariffs have on the vast majority of businesses that rely considerably on global supply chains to equip their operations with steel and aluminum, directing them towards a much costly alternative as a mean to protect the steel and aluminum sector in the United States.
Under those circumstances, a multitude of businesses have reported immense setbacks from the tariffs, with “Mid-Continental Nail, the nation’s largest nail manufacturer,” were “forced to raise prices after the tariff was imposed. This pushed orders down” as they relied on imported steel, and saw the company lay off “60 employees, warning that the entire company could be out of business by Labor Day”. Tariffs have also “discouraged buying American in the case of American Keg, the only stainless steel beer keg manufacturer in the United States”. The company was forced to lay off “10 employees” as it uses U.S. steel, Which saw a rise in it’s price due to the imposed tariffs on steel, increasing the price of the American Keg product, which ultimately corresponded to consumers shopping for alternatives and nullifying the profits for the American company. Moreover, in the case of REC Silicon, a company which operates in producing solar grade polysilicon, dramatic reduced production has forced them to lay off 40 percent of their workforce. Reasoning by board members included a reference to the trade war between the United States and China, explaining it as a “direct result of the ongoing solar trade dispute between China and the United States,”. Coca-Cola has also claimed that a rise in prices due to an increase in cost of aluminum is likely, with CEO James Quincey explaining that the change in input costs has affected the industry they operate in massively.
The automotive industry has also been directly impacted by the tariffs, with American companies like Harley Davidson and Ford coming out as strong opposers of Trump’s economic policies and tariffs. Harley Davidson has announced it “will begin to shift the production of motorcycles headed for Europe from the U.S. to factories overseas”. While Ford’s infamous Ford Mustang, the most popular american sports car in China, will see a decline in profit and economic growth, as China imposed retaliatory tariffs of 40 percent on imported U.S. cars. In both cases, loss of profit and changing the place of operation outside the US will lead to american jobs being lost as an outcome, inhibiting prosperity and forcing businesses to preserve their profit margin, which begins by translating the damage to the american consumers and workers. Trump’s tariffs have rather hurt businesses than protect them, and the aftereffect is adding more pressure on the american consumer to withstand the increased prices.
Conclusion
Forming of World Trade Organizations and the trade deals within the US have paved the path for the reducing of tariffs. Tariffs came back at a later stage of time in the event of the US countries moving the factories to China. The factories were moved to various low-wage countries who were then transported back to the place of the homelands. US imposed the tariffs so that it will be able to stop China from that of intellectual property theft. US believes in the fact that the Chinese laws are counteracting the property rights by adopting the process of driving the foreign countries so that they enter into joint venture with that of the Chinese firms. US is of the notion that this can help the Chinese partners in getting access to the new technologies so that they can be replicated. China has responded to allegations by stating that they have not committed any kind of theft and they do not possess legal authority that can help them in responding to the regulations related to World Trade Organization. The criticism of US was made by China on account of the export restrictions pertaining to high technology goods. US has been instrumental in imposing tariff costing around $ 250 billion that was worth of the Chinese exports. China has also retaliated by enacting tariff amounting to $ 110 billion on that of the US exports. These tariffs will pave the path for raising prices within China along with US and this will result in the imported goods costing more than owing to the factor of import tax. The increased prices on that of the imported goods will help the domestic manufactured product to raise the prices of the products that can help them in staying competitive. The increase in the prices of the goods would be transferred to the consumers who would have to pay more for the same product. Two-way tariffs will have an impact on US society also on the society of China. China would be badly hit on account of the fact that one quarter of the Chinese exports would go to U.S and around 8 % of the US exports will go to China. These tariffs would not be able to help people coming from China or the US. It has resulted into raising the prices and paved the path for lay offs within the organizations. The US has however been able to bring increased revenue for federal government of United States. Tariffs that would be imposed on that of China by US government would decrease industrial productivity within China. It would decrease the growth rate on that of GDP and bring about instability in relation to state of government in the country. The imposition of tariff would decrease the availability of the raw materials like steel along with aluminium. It would cause the manufacturing industries to halt the process of production at that of a considerable rate. United States would lose the GDP in the long term by around 0.12 percent that would account to around 30 billion US dollars. It can be concluded that GDP of China would decrease by around 0.38 percent. It can hence be stated that current tariffs would decelerate the growth taking place within China. It would have an effect on the political and the economic infrastructure of China. The loss of the aspect of profit in the US would pave the path for loss in relation to American jobs and inhibit the prosperity of the region. The tariff of Trump would harm the business instead of protecting them and it would add more pressure on that of American consumer for withstanding increased prices.
References
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