Why the Trade Arithmetic Favors China
US President Donald Trump’s decision to increase tariffs on Chinese goods risks disproportionately harming the US economy. Besides raising prices for American consumers, higher tariffs will make key production inputs more expensive or scarcer – seriously damaging US productivity and competitiveness in the long run.
NUREMBERG – The biggest risks facing the world economy today stem from the escalating trade war between the United States and China. In the past few weeks, the threat has gained greater salience: as negotiations have stalled and tariffs have risen, markets around the world have registered tremors of concern. Yet most commentators fail to recognize the kind of effect an all-out clash would have on the US economy, and on the world.
It is true, as US President Donald Trump has repeatedly pointed out, that his country runs a large trade deficit with China. In 2018, the US exported goods worth $120.3 billion to China – a substantial amount, but dwarfed by the $539.5 billion of goods that it imported from China. And while firing the latest salvo on May 10, when the US hiked tariffs on $200 billion worth of Chinese goods from 10% to 25%, Trump threatened to impose the same rate on virtually all imports from China. In retaliation, China imposed reciprocal tariffs on $60 billion worth of US exports, scheduled to take effect on June 1.
No one doubts that China has historically flouted many of the global norms of trade and exchange-rate management. But trying to correct this now by raising tariffs on Chinese goods is futile. Worse, it would disproportionately harm the US.