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US AND CHINA TRADE WAR: WHO LOSES OUT?

With both US and China announcing new tariffs on each other’s good, the trade war between the two nations has worsened. The Us President has continually said that China will pay these taxes. Larry Kudlow, his economic advisor has also said the US firms pay the tariffs on any goods brought from China.

Is Mr. Trump wrong if he says the trade war is good for the US and generates billions of dollars for the US treasury? Who will bear the burden if the war continues?

Who really pays the US tariffs?

The US tariffs are paid by US importers, not Chinese firms. These tariffs are paid in the form of taxes to the US government as confirmed by Christophe Bondy, lawyer at Cooley LLP.

Bondy says it is likely that these additional costs are simply passed to the consumers in form of high prices. “They [the tariffs] have a strongly disruptive effect on supply chains,” he says.

Impact on China so far

With exports rising 7% last year, China remains America’s top trading partner. Trade flows to the US however, slipped 9% in the first quarter of 2019. This suggests that the trade war is beginning to bite.

With exports rising 7% last year, China remains America’s top trading partner. Trade flows to the US however, slipped 9% in the first quarter of 2019. This suggests that the trade war is beginning to bite.

Despite this, a trade expert at the University of Cambridge, Dr. Meredith Crowley, says that there is no evidence that Chinese firms have cut prices to keep US firms buying.

“Some exporters of highly substitutable goods have just dropped out of the market as US firms have started importing from elsewhere. Their margins are too thin and tariffs are clearly hurting them. “I suspect those selling highly differentiated goods have not reduced their prices, possibly because US importers rely on them too much.”

What has impact on US been?

Two academic studies published in March show that American businesses and consumers bore the whole burden of US tariffs imposed on imports from China and elsewhere last year.

Economists from the Federal Reserve Bank of New York, Princeton University and Columbia University calculated that duties imposed on a wide range of imports, from steel to washing machines, cost US firms and consumers $3bn (£2.3bn) a month in additional tax costs.It also identified a further $1.4bn in losses linked to depressed demand.

The second paper penned by among others, Pinelopi Goldberg, the World Bank’s chief economist, also found that consumers and US companies were paying most of the costs of the tariffs.

According to its analysis, after taking into account the retaliation by other countries, the biggest victims of Trump’s trade wars were farmers and blue-collar workers in areas that supported Trump in the 2016 election.

However, Dr. Crowley and Mr. Bondy have stated that there is little evidence tariffs ever works. In 2009, President Obama placed a steep tariff of 35% on Chinese tyres, citing a surge in imports that was costing US jobs.

However, research from the Peterson Institute for International Economics  in 2012 found the cost to American consumers from higher tyre prices was around $1.1bn in 2011.

Although about 1,200 manufacturing jobs were saved, it said, the additional money US consumers spent reduced their spending on other retail goods, “indirectly lowering employment in the retail industry”.

“Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, costing that industry around $1bn in sales,” it said.

The one example given is the saving of the US bike-maker Harley Davidson from surge of foreign competition when President Ronald Reagan placed steep duties on Japanese motorcycles in 1983.

Questions bordering on if the Us tariffs will force China to strike a deal are emerging. Dr. Crowley said the possibility of the duties to draw China back to the negotiating table is there but he doesn’t expect them to offer radical compromises.

“Yes they are having more of a growth slowdown, and they export more to the US than vice versa, so they will suffer more from a trade war.

“But they are not really interested in changing their laws, and even if they did, do they really have the legal culture to enforce it?”

Mr Bondy thinks Mr Trump’s tariffs threats are more about whipping up his voter base and making headlines.

“Tariffs are easier to understand than the painstaking work of negotiating common sets of rules on things like the behaviour of state-owned entities, protection of intellectual property, fair access to markets and baseline protections for workers and the environment.”

All of these are coming after there were speculations that US and China were going to strike a deal as seen earlier.

Source: BBC NEWS

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