Extreme tariffs on Chinese imports could hurt the U.S. more than China

By Peter Morici

Americans already pay more for China-sourced goods

Former U.S. President Donald Trump has proposed a 60% tariff on Chinese imports if he is elected again this November. Yet such an extreme penalty wouldn't eradicate U.S. trade with China or even profoundly affect the size of the U.S. trade deficit. But it would accelerate changes in the structure of U.S. trade and make certain consumer goods more expensive.

As things stand, the demand for dollar-denominated securities creates a surplus on the U.S. capital account that is matched by a deficit on the U.S. current account - the broadest measure of the trade deficit. Those capital inflows permit Americans to consume more than they produce through the excess of imports over exports, and raises their standard of living.

A 60% tariff on Chinese imports would shift U.S. purchases to other countries and result in some reshoring, but would hardly eliminate trade deficits. China is a dominant supplier of wind turbines, batteries, lithium and rare earth minerals, for example. Allianz estimates China is a critical U.S. supplier for 276 types of goods.

In response to the tariff threat, U.S. businesses are importing more from Mexico and Vietnam, which in turn are sourcing more components from China. Elon Musk is encouraging Chinese parts manufacturers to locate near Tesla's new Mexican plant, and Chinese electric-vehicle manufacturer BYD is also considering a factory in Mexico, to circumvent U.S. tariffs.

U.S. manufacturers that use Chinese components would be at a decided disadvantage.

Americans already are paying more for China-sourced goods. After accounting for all the exemptions, the Trump administration raised the trade-weighted average tariff on U.S. imports from China to about 12% and increased prices on all final goods and services by about 1.3%.

The inflationary consequences of a 60% tariff on prices - if imposed - would be about five times larger. U.S. manufacturers that use Chinese components would be at a decided disadvantage against foreign producers in both the U.S. and export markets. The one-time increase in prices would lower U.S. living standards and could set off a wage-price spiral as workers seek to recapture real-income losses.

Whoever is president will face pressure to limit Chinese imports, because China is seeking bolster its domestic economy - besieged by a property meltdown - by boosting exports. Since peaking at 22% in 2017, the Chinese share of U.S. imports has declined to 14% and will likely continue falling, because China's unstable economic situation and arbitrary government policies make it a less reliable partner for business supply chains.

Read: China's economic moves threaten U.S. and European companies. Yellen is pushing back.

The troubles with China set up a real battleground in the rapidly growing markets of Southeast Asia and India. Potentially, the U.S. could increase its exports and develop cost-competitive alternatives to Chinese suppliers by more aggressively investing in these markets. For example, the U.S. should join the Trans-Pacific Partnership free-trade arrangement.

Cooperating with Europe and Japan to develop new sources of critical materials, as the Biden administration is pursuing, is important too. Instead, Trump's trade advisers are exploring new protectionist measures against EU trade, raising considerable alarm among U.S. allies. Equally harmful to cooperation on strategic materials are Trump's threats to abandon NATO allies.

Where higher tariffs make sense

Currently, total U.S. imports of goods and services from China exceed exports by a ratio of 2.8 to 1. To narrow this gap, the U.S. should require licenses to import from China, limit those to 2.5 times the value of U.S. exports, award licenses by competitive bidding and reduce the ratio each quarter until it reaches 1.0 after four years.

That would give priority to importers who most value Chinese imports, gradually raise the cost of those purchases, and provide time to develop alternative sources. Moreover, the inflationary effects would be mitigated as suppliers in the U.S. and in Asia, Mexico and Europe come online.

Still, this would not address the problem of Chinese factories moving to third countries or Chinese parts being routed though and then assembled in third countries. To reduce U.S. dependence on China more completely, the U.S. would have to tax the Chinese components contained in third-country imports or limit Chinese content through regulation.

Clearly, higher tariffs on China will be useful, but it is a matter of pace and degree.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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Also read: China's export-led growth model is broken and Beijing may be at a loss to fix it

-Peter Morici

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