The Pain of a Trade War With China

With a trade war between China and the United States looking increasingly likely, I wanted to use this posting to briefly survey what some economists and industry groups feel will be the negative impacts of a trade war and who would be the winner and loser in this battle of economic giants.

1.) Institute for Management and Development - Professor Winter Nie: Dr. Nie notes that a trade war would be problematic for China and the rest of Southeast Asia, however, a trade war will be less disastrous for the Chinese economy than for the American economy.  She notes that China now has most of the technology and manufacturing techniques that it needs to continue to manufacture without the aid of U.S.-based technology and that it can acquire additional technologies from vendors outside the United States.  The fastest growing markets for technological goods produced in China are now outside the United States and include India, Latin America and Africa.  For example, by the end of 2015, American consumers had purchased a total of 110 million iPhones compared to 131 million iPhones purchased by Chinese consumers over the same period.  As well, Korea-based Samsung is more than willing to supply phones to Chinese consumers, cutting Apple's products out of the equation should they command an even greater price premium than they do now.  Boeing, which employs 150,000 workers in the United States is projected to sell roughly 6800 aircraft to China over the next two decades; any trade dispute that would result in China imposing tariffs on Boeing's products would hurt American workers the most since China has the option to switch to purchasing lower-priced and roughly equivalent aircraft from Europe's Airbus.  As well, companies like Walmart who specialize in low-priced Chinese goods would see the prices of their products rise under a trade war; should tariffs on these products be increased, it is the lower economic brackets of Americans (who just happened to be Trump voters) that would suffer the most.  When it comes to cars, Chinese consumers could easily switch to European or Japanese cars rather than buying from America's largest auto manufacturers. 

2.) The Economist Intelligence Unit - Alex Capri:  Mr. Capri notes that U.S. consumers would bear the brunt of tariffs imposed on China-sourced consumer products; prices would rise, pushing inflation upwards since most of the retail businesses in the United States have a significant portion of their inventory sourced from China.  He estimates that U.S. consumers would see inflation rise by 1.5 percent higher than baseline in 2018 and American private consumption growth would drop under a trade war as shown here:

The impact on Chinese consumers would be modest since the United States does not supply a major portion of consumer goods to China outside of luxury brands.  

U.S. retail companies would be forced to find alternative low-cost consumer products to replace products sourced in China, a problematic issue, particularly if American companies plan to relocate their production facilities back to the United States where costs of production are far higher than they are in China.  Obviously, the increased costs associated with repatriation or relocation of production facilities will be passed along to U.S. consumers.

3.) American Enterprise Institute - Dr. Mark Perry - Dr. Perry opens his analysis of Donald Trump's steel and aluminum tariffs with this graphic:

Roughly 170,000 Americans are employed in the steel and aluminum manufacturing business compared to 6.5 million workers who are employed in companies that use steel and/or aluminum in their production processes.  As the cost of both steel and aluminum rise, thanks to the newly imposed tariffs, the businesses that use these two metals will find their costs increased, pushing profits down and reducing job security for the 6.5 million workers that they employ.  He also notes that following President George W. Bush's imposition of tariffs on steel in 2002, the steel-using industries lost 200,000 jobs, more than the number of workers employed in the steel manufacturing industry as a whole.  Here's a quote from Dr. Perry's assessment:

"Whether you look at jobs lost vs. jobs saved from tariffs, the costs to consumers per job saved by protectionism, or the costs to consumers vs. the benefits to protected producers, the math of protectionism always leads to the same conclusion: the country imposing protectionism is made worse off on net, and suffers from net job losses."

4.) Wine Institute:  The Wine Institute is a public advocacy organization that represents 1000 California-based businesses which are responsible for 85 percent of American wine production and 97 percent of all U.S. wine exports.  Here is a quote from a March 23, 2018 press release on the Wine Institute website 

"Today’s announcement by China’s Ministry of Commerce that it may impose retaliatory tariffs on U.S. wine imports could have a significant negative impact on the future growth of wine exports to China. China is one of the fastest growing wine markets in the world and will soon be second only to the U.S. in value. U.S. wine exports to greater China (including China and Hong Kong) were up 10% in 2017 to $197 million. The value of U.S./California wine exports to China alone have increased 450 percent in the past decade.

“Chinese retaliation against U.S. wine would put our producers at a significant disadvantage in one of the most important markets in the world at a critical time,” said Robert P. “Bobby” Koch, CEO of Wine Institute. “As a result of free trade agreements, a number of our foreign competitors will soon have tariff free access to the Chinese market. This, combined with additional punitive tariffs on California wine, could result in lost market share for years to come.”."

For your illumination, the California wine industry contributes $114 billion annually to the U.S. economy and employs 786,000 American workers.  Other nations like Australia and New Zealand, both renowned for producing high quality, premium wines, could easily step in and replace American wine products.  Interestingly, Australian wine exports to China were up 63 percent in 2017, hitting $848 million in total value as shown here:

While on the topic of Australia, it is important to remember that, on December 20, 2015, the China-Australia Free Trade Agreement (ChAFTA) entered into force.  China is Australia's largest trading partners, purchasing more than one-quarter of Australia's total exports to the world in 2016.  China has also been a strong investor in Australia with investment reaching a level of $87.2 billion at the end of 2016.

This tit-for-tat economic war could prove to have significant and unintended negative consequences for the United States economy as well as for both American workers and consumers.  Despite Donald Trump's beliefs that trade wars are easy to win, history suggests that there is always a loser in a trade war and in the trade conflict with China, America is likely to fare poorly.  When we see nations like Australia, a geographically closer neighbour to China, willing to sign a freer trade deal with China in 2015, it makes one realize how the United States is setting itself up for significant trade pain with its recent moves against China.