Trump’s bad math on Chinese tariffs

The trade war took another step in the wrong direction this month when China announced new tariffs on another 5,000 American-made goods. President Trump was quick to respond that the United States would be “better off without [China]” and that American companies should “start looking for an alternative.”

Unfortunately, that’s not how the global economy works. The U.S. and China are tied closely to one another. New trade relationships can’t be created overnight, and mounting tensions continue to hurt American firms.

Trump’s strategy is based on the idea that the U.S.-China relationship is one-sided. In 2018, imports from China exceeded U.S. exports by $420 billion. That looks like leverage. There are simply more Chinese goods to target. To Trump, that means U.S. tariffs punch harder than China’s retaliation. No surprise that the White House insists trade wars are “easy to win.”

That arithmetic sounds simple enough. In 2018, U.S. tariffs hit $250 billion in Chinese imports while Beijing’s retaliation affected $110 billion worth of American exports. In a war of attrition, the U.S. looks well-poised.  

But it’s not that simple. Those numbers understate China’s role as an important buyer of American exports.

The clearest example is U.S. agriculture. Beijing hammered American farmers in every round of its retaliatory tariffs. Those policies matter. China was the second largest buyer of U.S. agricultural products in 2017. In 2018, China fell to fifth place as purchasing tumbled due to trade restrictions. The result was losses of $10 billion, as U.S. agricultural exports to China dropped from $19.6 to $9.2 billion.

Trump’s solution to that loss? Find another buyer.

That’s easier said than done. Soybean growers can’t create a trade route where one doesn’t exist. There simply aren’t new markets sitting around waiting to soak up goods diverted by China’s trade barriers. As a result, that $10 billion worth of exports destined for China didn’t find a new home. Quite the opposite. Excess U.S. production remained in storage as total agricultural exports fell across the board in 2018. The result is a net loss. Rather than establishing new trade relationships, the U.S. has had to increase farm subsidies to offset the damage.

Agriculture is just one example. Thousands of other exports now suffer from reduced access to China’s market. And none of this is a surprise. Economists and many U.S. industry groups opposed Trump’s tariffs from the start. There were clear warnings that trade protection would cut off markets abroad and raise costs at home.

Now the damage to U.S. firms is no longer theoretical. Any lingering debate over whether the trade war benefits the American economy is being put to bed by the headlines coming out of Wall Street.

During the summer of 2018, in the early stages of the trade war, major stock indices looked indifferent to the first few rounds of tariff hikes. Investors may have hoped the storm would pass quickly. Now those hopes have vanished. Stock returns provide daily reminders of how much U.S.-China trade relations matter, and how closely the health of these two economies is linked.

Each new escalation in trade tensions causes large nominal sell-offs. The Dow Jones Industrial Average suffered three 500-point drops in August alone. Certainly, not all the news out of Wall Street has been bad. There have been modest recoveries. But experts are now worried because markets are currently much more volatile. Share prices adjust to each new tweet and investor confidence is waning.

Wall Street’s mood swings aren’t normal. They are a direct response to the trade war’s adverse impact on important sectors of the U.S. economy. Rising metal prices were partly blamed for revenue problems facing major manufacturers like General Motors and Caterpillar. And it’s not just machinery. Even Trump admitted Apple products would suffer from price increases — though he argued that was a good thing.

Recent stock market volatility illustrates the flaws in Trump’s latest logic. New trade partners aren’t found overnight. Trade relationships are based on long-term contracts that benefit from stability in the global marketplace. U.S. firms can’t simply abandon their connections to China. Besides, if there were alternatives to China, as Trump claims, U.S. firms would already be taking advantage of them. And we wouldn’t need a trade war in the first place.  

Jeffrey Kucik is an associate professor in the School of Government and Public Policy at the University of Arizona.