Tag Archives: Chinese Tariffs

Some Perspective On The US Trade Deficit With China

In light of increasing trade threats between the US and China, some perspective on US trade deficits is warranted. Piecing together data from a variety of sources, the following chart shows the US balance of trade since 1790, shortly after the country’s founding.

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The US maintained very closely balanced trade for the first 200 years of the country’s history. From 1790 until 1974, the last year in which the US ran a trade surplus, the US exported roughly $102 billion more than it imported. Since 1974, the US has run a cumulative trade deficit exceeding $11.64 trillion. In other words, in the last 44 years the US trade deficit was 113 times larger than the trade surplus it amassed during all previous American history. The massive deterioration in the US balance of trade since the 1970s is both historically anomalous and highly unsustainable. That multiple Presidents and Congresses have come and gone without taking serious action to correct the imbalance is indefensible, particularly given the American people’s near universal recognition of the problem and its deleterious impacts.

The US is not starting a trade war, the US has been in a trade war since the 1970s and it has been losing badly.

As we discussed here, the bulk of America’s trading problem is not with its free trade partners. The US has entered into free trade agreements with 20 countries and has seen its balance of trade improve with 16 of them since adopting an agreement. The notable exceptions are Mexico and Israel. The following chart shows the indexed change in the balance of trade with the US’s free trade partners since the inception of an agreement.

https://i0.wp.com/thesoundingline.com/wp-content/uploads/2017/02/Change-in-US-Trade-Deficit-With-Free-Trade-Partners.jpg

The majority of the US trade deficit is a result of trade with China. The US trade deficit with China is roughly $375 billion, 66% of the total US deficit. If the US managed to eliminate its trade deficit with every country in the world expect China, it would still have the largest trade deficit in the world.

The rarely discussed truth of the matter is that, in addition to a host of non-tariff trade barriers and intellectual property theft, Chinese import tariffs are over twice as high as import tariffs in the US. That the Chinese feel the need to maintain such high import barriers, despite their huge trade surplus and far lower manufacturing costs, is remarkable. They are trying to protect their high tech industries from American competition while denying the US the same privilege.

https://i0.wp.com/thesoundingline.com/wp-content/uploads/2018/03/Weighted-Average-Import-Tariffs-Around-the-World-2016-web.jpg

About 19% of Chinese exports go to the US, making the US the largest export destination for Chinese goods. Conversely, only about 8% of US exports go to China, the third largest export destination for the US. Furthermore, trade represent a significantly larger piece of the Chinese economy than it does in the US. Chinese exports to the US are also generally products that can be manufactured in other lower labor cost economies such as India, Taiwan, or Mexico.

Given all of these factors, China’s overt unwillingness to take any action to remedy a clearly unsustainable situation is likely to encourage, not deter, further American tariffs. It will be to everyone’s detriment, but mostly theirs.

Source: The Sounding Line

Where Prices Are About To Surge: Chinese Imports Targeted By Trump Tariffs

Yesterday, in “Here Comes The Main Event: Trade War With China, And What Is Section 301“, we wrote that Trump’s recently announced global steel and aluminum tariffs were just a (Section 232) preview of the (Section 301) main course: Trump’s imminent trade war with China, which will be unveiled any moment in the form of tariffs and restrictions on trade with China, reportedly in retaliation for Chinese IP violations.

Today, Goldman’s chief political economist Alec Philips, picks up on this and confirms that he too expects “the Trump Administration to announce tariffs on imports from China in coming weeks, as part of an intellectual property-related investigation that could also include restrictions on Chinese corporate investment in the US and restrictions on the export of intellectual property to China.”

Conveniently, we already know in rough terms what this escalation will look like: in a preview of his trade war with China, Trump in January said in a Reuters interview that “we have a very big intellectual property potential fine going, which is going to come out soon,” and more recently announced that the “U.S. is acting swiftly on Intellectual Property theft” after a series of tweets on trade policy. 

And while the White House has not provided its own estimate of the cost of IP infringement, a frequently cited estimate from the Commission on the Theft of American Intellectual Property puts the annual cost to the US economy at $225bn overall. The US International Trade Commission (US ITC) placed the cost of lost sales, royalties, and licensing fees due to infringement by Chinese companies at $48bn in 2009 (or over $60bn in 2017, if held constant as a share of world GDP).

As we explained yesterday, and as Goldman reiterates, in 2017, US imports from China totaled around $500bn, so tariffs equal to the low end of the range of estimated economic damages from IP-related policies would require a 12% tariff on all imports from China, or a much higher rate on a narrower segment.

https://www.zerohedge.com/sites/default/files/inline-images/trump%20trade%20specific.jpg

This is confirmed by recent reports by Politico and Reuters suggesting that the categories of imports targeted could total $30bn to $60bn. This suggests that the Trump Administration might be leaning toward high tariff rates on a narrow segment of imports.

But which Chinese imports will be targeted: that is a critical question as the resulting tariffs will send prices of the products surging, with significant downstream consequences for both US producers and consumers, as well as corporate margins.

Ultimately, the decision which factors to consider will depend in part on who is advising the President on trade policy. Goldman here expects that USTR Robert Lighthizer will take the lead in developing the list, with input from White House trade adviser Peter Navarro and, ultimately, the President himself. The Treasury will play a larger role in determining the investment restrictions.

With that in mind, in attempting to answer what goods might be targeted when/if Trump decides to follow through with Chinese import tariffs, Goldman has looked at imports from China in 57 categories. The answer is shown in the table below.

https://www.zerohedge.com/sites/default/files/inline-images/china%20import%20sectors.jpg?itok=ttREXfT0Click graph for larger view

Commenting on the ranking above, Goldman first separates categories in which the US runs a bilateral trade surplus, as it seems unlikely that the Administration would impose tariffs here. These categories are shown at the bottom of the table. From there, industries are ranked using a weighted average z-score across the five criteria shown:

  1. the US-China bilateral trade balance,
  2. the US-China tariff differential,
  3. the share of imports that go to final use (generally consumption or investment) rather than use as intermediate inputs into other industries,
  4. imports from China as a share of total domestic intermediate and final demand,
  5. and whether the category was highlighted as a priority in the Made in China 2025 report.

Power tools and electrical appliances top the list, based on a substantial bilateral trade deficit, higher tariffs applied in China versus the US, and high share of imports going to final (in this case, consumer) use.

Sporting goods, toys, jewelry, and consumer electronics like TVs rank highly, for the same general reasons. However, in most of these categories, imports from China constitute a large share of total domestic sales of these products.

This is not true in the next set of product categories, ranging from aeronautical and marine navigation equipment , rail equipment and ships to furniture and household appliances, where Chinese imports represent a small share of total domestic sales, in some cases because domestic production still exists.

By contrast, the White House seems very unlikely to apply tariffs in categories where the US enjoys a trade surplus, such as aircraft, soybeans and other agricultural exports.

Of course, these will be the first categories Chinese policymakers consider when they impose retaliatory tariffs against the US, which should happen just days after Trump launches the China trade war.

Source: ZeroHedge