Monday, May 13, 2019

Trade War Escalates As China Responds With New Tariffs

The Trump Administration implemented a new 25 percent tax on $200 billion of Chinese imports last Friday. This morning the Chinese responded with their own salvo of additional trade taxes that will be applied to American-made goods. The Chinese government announced that it would increase tariffs on more than 5,000 US-imports effective June 1. The tax on American goods will rise from 5-10 percent to between 20 and 25 percent.

CNBC reported that many of the new duties attack US agricultural products, which have proven especially vulnerable to the trade war. Despite a $12 billion bailout last year, farm incomes fell by $11.8 billion in the first quarter of 2019. The drop was steep enough to sap national figures on personal income growth even though farmers make up only two percent of the nation’s workers. The effects of the trade war on farmers may be contributing to the softness of Trump’s approval in many red states where agriculture makes up a large part of the economy.

President Trump responded to the Chinese announcement with a tweet that warned, “China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries.”

Contrary to the president’s statement, the new US taxes on Chinese goods will ultimately be paid by American consumers and will not make Chinese goods more expensive elsewhere. Likewise, the Chinese retaliatory tariffs on American goods will apply only to American goods imported to China. The trade war will affect on trade with other countries except that prices will rise due to decreased competition.

Prior to last week, US officials sounded confident on the progress of trade talks with China, but there were hints that the picture was not as rosy as it was depicted. In March, President Trump signaled his resistance to lifting the tariffs, saying, “We’re not talking about removing them, we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal because they’ve had a lot of problems living by certain deals.” At the time, The Resurgent pointed out that a deal would be difficult if the tariffs were not removed.

Similarly, US demands that China change its laws have been met with resistance. The South China Morning Post reported earlier this month that China wanted to provide verbal assurances and small concessions on issues such as government subsidies, intellectual property rights, and technology transfers, but the US was standing firm.

Now China says that it will not agree to Trump’s demands. “At no time will China forfeit the country’s respect, and no one should expect China to swallow bitter fruit that harms its core interests,” said a commentary in Communist Party newspaper. “If they weren’t being seriously provoked, the Chinese people would not favor any trade war. However, once the country is strategically coerced, nothing is unbearable for China in order to safeguard its sovereignty and dignity as well as the long-term development rights of the Chinese people.”

Over the weekend, White House Economic Advisor Larry Kudlow also contradicted President Trump’s claims that the tariffs would be paid by China. Speaking to Fox News, Kudlow agreed with host Chris Wallace’s statement that China “may suffer consequences, but it’s U.S. consumers and businesses who pay.” Kudlow added that “both sides will suffer.”

Indeed, the pain may spread beyond American farmers to become more widespread under the current round of tariffs. A report by Trade Partnership Worldwide found that the taxes on trade have offset the gains from the tax reform. Goldman Sachs noted that consumer prices have risen sharply since President Trump implemented his policy of tariffs last year. The increasing cost of taxes on trade means that The trade war is costing American consumers money, both directly through higher taxes and indirectly through higher costs resulting from less competitive markets.  

As the trade war continues to escalate, it will become harder for both President Trump and Chinese President Xi Jinping to back down and reach an agreement. As both sides suffer the effects of the trade war, President Trump may find it that the economic pain makes his reelection campaign difficult.

Originally published on The Resurgent

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