Monday, July 22, 2019

The Pros and Cons of Trump’s Tariffs On Chinese Products

In July-August 2018, President Trump imposed 25% tariffs on $50 billion of Chinese high-tech goods imported into the United States.  He followed in September with 10% tariffs on another $200 billion of Chinese products, which he subsequently raised to 25% on May 10, 2019.  The additional $200 billion of Chinese imports included lamps, air conditioners, vacuums, personal grooming items, handbags, raincoats, knitted hats, baseball gloves, headgear, bicycles, tuna, halibut, salmon, pears, dog leashes, collars, harnesses, diaries, toilet paper, tobacco, hammers, faucets, screwdrivers, and other consumer goods.

If the two sides fail to reach a deal by some unspecified date, President Trump has threatened to impose 25% tariffs on an additional $300 billion of Chinese products.

Here are some numbers to assess the impact of Trump’s current and threated tariffs.  In calendar year 2018, the U.S. imported $540 billion of Chinese goods, exported $120 billion of goods to China, resulting in a merchandise trade gap of $420 billion.  (The corresponding numbers for 2017 are $505 billion [his oft repeated number], $130 billion, and $375 billion.)

President Trump refers only to merchandise trade, not the current account, which includes services and factor payments.  The U.S. runs a positive balance on services with China, thus reducing the overall trade gap.

During September-December 2018, U.S. imports of Chinese goods amounted to $195 billion, a small increase of $9 billion over $186 billion for the comparable September-December of 2017.  Trump’s tariffs of 25% on $250 billion of Chinese goods seems to have had no perceptible impact on the dollar value of Chinese products imported  into the U.S in the last four months of 2018.

The pattern changed in January 2019.  During January-May 2019, U.S imports from China fell $25 billion to $180 billion compared with the same five months of 2018.  Since U.S. GDP in Q1 of 2019 grew 3.1%, it’s hard to blame the decline of $17 billion in January-March 2019 year-over-year on slowing growth.

President Trump talks of billions of dollars collected in tariffs.  If fully collected, a 25% tariff on $250 billion in goods from China will yield $62.5 billion in annual revenue.  If Trump were to impose a 25% tariff on all imported Chinese goods (assume $500 billion in value), annual revenue would total $125 billion.

Some of the $125 billion would be borne by Chinese producers who lower their prices and some by American importers who reduce their prices to maintain a competitive edge.  Some would be borne by workers who lose their jobs and some by consumers in higher prices.  The precise percentages borne in each category are statistical guesswork based on various economic assumptions about elasticities (never mind that here), but Americans will pay some of the tariffs, a transfer from U.S. producers, retailers, workers, and consumers to the U.S. Treasury.  

Let’s put tariffs on Chinese goods in perspective.  July 2019 federal budget estimates for Fiscal Year 2019 (October 1, 2018 through September 30, 2019) are $4.529 trillion in spending, $3.438 trillion in revenue, with a deficit of $1.092 trillion.

Tariffs of $62.5 billion, the current level, amount to 21 days of the federal deficit, 7 days of revenue (non-borrowed), and 5 days of expenditure.

If Trump applies 25% tariffs on all Chinese imports, $125 billion in revenue amounts to 42 days of the deficit, 13 days of revenue, and 10 days of spending.

Billions are big numbers, but tariffs on Chinese imports are a small percentage of federal borrowing, revenue, and spending.  Worse, from these billions must be subtracted slower growth, less business activity, and lost jobs, resulting in less revenue from income, corporate, and social insurance taxes.  Trump’s tariffs could be fully offset or more in lost revenue from other taxes.

So, why impose them?  Maybe Trump’s economic advisors failed in explaining the balance of payments to him, or the impact of tariffs on economic activity, or gave up trying given his obsession with bilateral merchandise trade.

Perhaps President Trump believes that tariffs will force China to agree to more favorable trade practices, maybe necessary for U.S. national security and protection of next generation technology, and preservation of jobs in key political battleground states to enhance his reelection prospects.

Where do I come out on Trump’s trade policy?  The idea of any of the current Democrat candidates taking over the White House is too painful to bear.  If jobs in the battleground states are enhanced by tariffs on Chinese goods, so be it.  Apart from that and national security, there is little, if any, case to be made for U.S. benefits of tariffs on Chinese goods.  Preserving economic freedom, with a few caveats, is a high priority.

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