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.