Trade War

This weekend, the U.S. business community has been focused on whether President Trump will make good on his threat to actually impose new tariffs against $300 billion of imported Chinese products on “List 4” after his meeting with President Xi at the G-20 Meeting. But what they are also watching with alarm is that China has been actively reducing tariffs on the rest of the world’s access to its $1.4 billion consumer marketplace.

As China lowers tariffs for the rest of the world’s products to an average of 6.7%, China has increased tariffs on US exporters to an average 20.7 percent effectively adding a second penalty for the US in this trade war. Not only are U.S. firms paying the tariffs for goods imported from China they are now losing market share in China due to this tariff imbalance. A good example of this new consequence of the trade war are farm and fish products where China has increased the duties on U.S. exporters from an average of 21% to 42%. But it has lowered the average tariff on the rest of the world to 19 percent. There is now a sizeable difference between the tariffs facing US exporters and those facing exporters elsewhere.

However, China has not extended this practice to all commodity sectors. By not following the American’s lead in increasing tariffs on all US imports across the board, excepting autos, aircraft, and pharmaceuticals, China mitigated the harm on themselves. Additionally, China’s tariff manipulations have minimized the harm to its own economy by importing vital goods at better prices from other parts of the world. The change is significant because as recently as early 2018, firms in both the United States and the rest of the world competed in China with each other on a level playing field, facing an average Chinese tariff of 8.0 percent.

What this means is American companies are now at a significant cost disadvantage, not only to Chinese firms, but also to competition from firms in all other countries. One trade expert commented in a blog this week, that today’s circumstances have an “eerie parallel” to conditions US exporters faced in the 1930s. Just as China has responded, there was a two-pronged international reaction to the United States’ imposition of its infamous Smoot-Hawley Tariff Act. As it existed then and now today, U.S. exporters faced higher tariffs due to retaliation and market share loss when countries like Canada and the United Kingdom lowered tariffs only on each other by forming the system of Imperial Preferences.

It isn’t at all clear what will come out of the discussions with China this weekend, but this last week, the President at various times said with regard to the $300 billion of “List 4” products, that he might postpone the tariffs if the talks with President Xi are productive or go ahead and impose them at 10%, not 25 %.

What was also learned this last week, in private meetings with USTR Lighthizer, is that there are actually more Chinese products that the U.S. could still put tariffs on, including baby products and other consumer products like toothbrushes. While consumers are not seeing a significant detrimental impacts due to the existing $250 billion dollars-worth of tariffs being paid by U.S. importers of Chinese goods, as they are not all being passed on to them, tariffs on this potential “List 5” would be felt by American consumers almost immediately.

Moreover, the tariffs on China aren’t our only trade war being discussed this weekend in Japan. The Trump Administration pulled the U.S. out of the Trans-Pacific Partnership (TPP) agreement in January 2017 of which Japan was a principal party. That agreement was inked then without us, disadvantaging American agriculture as Australia, Canada, New Zealand, Thailand, the European Union and other agricultural exporters enjoy lower tariffs in Japan because those countries agreed to implement the agreement. American beef is being shut out of Japan as well as many other American products like canned corn, that held market share, which is losing the market completing because it is the only imported corn with a duty. Senate Finance Committee Chairman Chuck Grassley and other farm state members have been pressing the Administration to quickly negotiate a treaty with Japan to try to get us back to par with other exporters.

While the outcome of these various discussions isn’t clear, what is clear is that the use of tariffs in foreign relations is the new norm!

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