Effects of US-China Import Tariffs on Their Economies and Consumers

In March, the US announced 25% tariffs on steel imports and 10% tariffs on aluminium imports from countries including China. In response, China retaliated in April with 15-25% import tariffs on 128 US products ranging from aluminium waste and scrap, to pork, fruits and nuts, and others. Following his original tariff roll out, President Trump signed a memorandum on imposing additional import tariffs on 1,300 Chinese goods, with a focus on high-tech items. China responded with a tariff hike on a similar value of US goods’ imports, including soybeans, aircraft, and autos. This article analyses the impact of the US and China tariff actions on their economies and consumers, and explores the possibility of these actions turning into an all-out trade war between the world’s two biggest economies.

 

Impact on economies and consumers

The recent US tariffs on Chinese imports are focused on B2B goods, and the list seems to have been chosen with a concern for reducing the impact on consumers that could affect upcoming congressional elections results. However, the tariffs would still raise prices for consumers indirectly, due to firms passing on higher production costs into final prices. From the Chinese side, the new tariffs on US imports affect a diverse set of industries such as soybeans, vehicles, chemicals and aircraft. In response to the Chinese tariffs, US President Trump threatened he may also raise tariffs on another USD100 billion in Chinese imports.

The current tariffs stand at USD12.5 billion (on USD50 billion in imports from both sides), representing less than 0.1% of Chinese or US GDP. The specific tariffs announced so far have quite a small macro impact on either China or the US, on the order of 0-0.2 percentage points lower GDP levels.

Unofficial sources suggest the US and China started trade talks soon after the April announcement. However, talks apparently broke down after the US insisted China significantly reduce its support for domestic high-tech industries. This came after Chinese negotiators offered to take measures to reduce the trade deficit by USD50 billion by encouraging more US imports, in addition to a speech by Chinese President Xi promising to reduce import tariffs on cars and other products.

 

Impact on B2B industries

According to the list of products provided by the US administration, the new trade tariffs primarily target accumulators and electrical equipment, machinery, rubber products, basic chemicals, electronics, metals, engines and generators, transport equipment and pharmaceutical industries. In addition, some smaller industries such as appliances for measuring and testing, weapons or industrial control equipment are included.

The impact of new tariffs on product prices may vary among different industries. The highest impact is likely to be felt on accumulators, batteries and electrical equipment as well as on industrial machinery products. The US imports more than one-third of the aforementioned products and a significant share of imports come from China. Therefore, new tariffs would inflate product prices and have an impact on buyer industries. In particular, motor vehicles, construction, aerospace, machinery and energy Industries would feel the most negative impact.

New tariffs are likely to have a moderate impact on rubber products such as tires or conveyor belts, appliances for measuring, basic chemicals and electronic components industries. Additional tariffs on Chinese-made components would inflate the prices for buyers, however the effect would be softened by a well-diversified import structure. Thanks to that, US manufacturers could replace Chinese imports with production from other countries. However, this would still put pressure on component prices and encourage manufacturers to re-evaluate their supply chains. In particular, tariffs on rubber products, electronic components, basic chemicals and appliances for measuring would impact motor vehicles, chemicals and electronics industries.

Lastly, new tariffs on metals, weapons, transport equipment and pharmaceutical products are likely to have minimal effect. The aforementioned Chinese-made products represent a relatively small share of the overall import structure and US manufacturers could replace Chinese products with imports from other countries. Nevertheless, new tariffs might still cause some disruption for motor vehicles, aerospace or construction industries. Despite minimal expected effect on input prices, manufacturers still may need to re-evaluate their supply structure. Moreover, tariffs on some specific products or components where switching costs are high might inflate input prices for consumers of metals, weapons, transport equipment or pharmaceutical products.

Overall, the proposed tariffs are so far focusing on B2B goods. Therefore, potential cost increases would be absorbed by manufacturers, while households are shielded from direct cost increases. However, the tariffs would still raise the prices for private consumers indirectly as manufacturers would partly pass higher production costs on to households. In particular, price increases on automotive products, rubber products and electronics could be expected. Higher costs of industrial machinery and similar equipment components would also put pressure on consumer goods prices, such as food products, textiles or energy products.

Import Share and Tariff Impact on Selected US Manufacturing Industries: 2016

Industry Import share (% of total market), 2016 China’s share (% of total imports), 2016 Impact of new tariffs Key buyer industries, which will feel the indirect impact
Accumulators, Batteries and Electrical Equipment 38% 35% High Motor Vehicles, Construction, Public Administration, Telecommunications
Food, Textile and Industrial Machinery 31% 23% High/Moderate Construction, Machinery Industries, Motor Vehicles, Aerospace, Energy industries
Rubber Products 30% 16% Moderate Households, Motor Vehicles, Public Administration, Road Transport, Construction
Appliances for Measuring and Testing 29% 15% Moderate Energy and Recycling, Aerospace, Public Administration, Hospitals
Basic Chemical Products 23% 15% Moderate Chemicals industry, Plastic Products, Paints and Varnishes, Public Administration
Electronic Components 76% 16% Moderate/Low (US companies may find replacement for Chinese components, since China’s import share is relatively low) Motor Vehicles, Computers, Telecommunications, Mobile Phones
Industrial Process Control Equipment 36% 10% Moderate/Low Metal Products, Construction, Plastic Products, Chemical Products
Engines, Turbines and Generators 34% 10% Moderate/Low Energy industries, Motor Vehicles, Ships, Aerospace, Construction
Iron, Steel and Non-ferrous Metals 28% 4% Low Metal Products, Motor Vehicles, Machinery, Construction, Aerospace
Weapons and Ammunition 11% 4% Low Public Administration, Electronics, Households
Transport Equipment 27% 4% Low Households, Public Administration, Road Transport, Wholesale
Pharmaceuticals 43% 3% Low Households, Hospitals, Public Administration, Veterinary Services

Source: Euromonitor International

 

Is this the beginning of a trade war?

An all-out trade war is unlikely because China can attain most of its goals in fighting against tariffs by hitting specific US multinationals that have a big presence in China or a strong reliance on Chinese suppliers. These large multinationals have powerful lobbies that could pressure the US government to relax tariffs under threat of retaliatory actions from the Chinese government. In this scenario, several large US companies could be severely hurt but with a small impact on the overall US economy. Furthermore, there may be political gains to China acting more moderately than the US. This would improve its image as a more globalist, pro-free trade, world power that could eventually take over the global leadership role from the US.

However, trade war risks have still significantly increased since the beginning of 2018. In our Trump Trade War scenario, bilateral tariffs between the US and China increase by 15-25 percentage points. In this scenario, over a 3-year horizon, US real GDP declines by 1-1.5%, while China’s GDP declines by 1.5-2% relative to the baseline forecast. We assign this trade war scenario a 10-20% probability over the next 12 months, and a 15-35% probability over the next two years.

Impact of Trump Trade War on Key Macro Indicators in US and China: 2017-2022