Leibowitz on Trade: Tariff Wars Escalate?

The president also announced that “shortly” he would increase tariffs on the remaining $325 billion of U.S. imports from China. The tweet did not say that the new tariffs could be avoided if a deal were reached, but this is implicit.

Why now? A delegation of more than 100 Chinese trade officials is scheduled to arrive in Washington on Wednesday to continue discussions with U.S. officials about a trade deal covering many areas of U.S.-China relations, including foreign investment restrictions, intellectual property protection (or lack thereof) by China, promotion of tech industries (the “Made in China 2025” program, among others) and a variety of other trade-related issues. Because the Trump administration and the Chinese government have made very few public announcements about the talks, the press and policy wonks are left to speculate about whether the talks will be concluded soon and whether the deal will be comprehensive or more modest in its approach.

Based on all the evidence I’ve seen about the talks, the Section 232 steel and aluminum tariffs, the possible Section 232 auto and auto parts tariffs and the USMCA talks, it is possible to draw some tentative conclusions.

First, President Trump appears to be frustrated by the slow pace of the negotiations. He believes that the negotiators (evidently his side and the Chinese side) need “encouragement” to reach a deal soon, so he and President Xi Jinping can schedule a summit meeting. The announcement this morning stated clearly that the List Three tariffs on China, affecting $200 billion of imports from that country (2017 value), would increase by 2½ times in five days. For those of you with shipments on the water, some urgent arrangements need to be made.

The second announcement that tariffs on the “untaxed” portion of China trade would “shortly” be taxed at 25 percent provides additional “encouragement” to negotiators to find common ground.

Both moves were postponed for 90 days on Dec. 1 to allow negotiators time to reach a deal. In February, President Trump indefinitely postponed the effective date of any new or increased tariffs, signaling that a deal would be reached soon. Now the frustration is starting to show.

President Trump has declared himself “Tariff Man.” Many of his supporters think he is correct that tariffs are paid not by U.S. consumers but by the Chinese sellers of goods, who are anxious to maintain U.S. market share and are reducing prices. He also claims that the tariffs on Chinese imports are “partially responsible” for the robust U.S. economy.

The numbers don’t really bear out either claim. Legally, U.S. importers, not Chinese exporters, are responsible for paying the tariffs on Chinese goods coming into the United States. Manufacturers’ production costs therefore have gone up. In addition, a brief look at the import values of Chinese goods suggests that the “dutiable value” of imports has not gone down at all. In fact, total imports from China increased nearly 7 percent from 2017 to 2018 (this does not include duties). This does not necessarily show that Chinese exporters are not absorbing any of the increased duties, but tends to show that any absorption is not significant in the grand scheme of things.

As for the responsibility for the economic boom we are experiencing—a better case can be made that growth would have been even greater had the tariffs not been in effect. Tariffs are taxes, and taxes stunt economic growth. Consumers generally don’t see tariff bills in their credit card statements, but they pay them because the prices are higher than they would otherwise be.

Because many steel and aluminum products from China are already excluded from the U.S. market by antidumping and countervailing duties, the addition of steel-containing products such as auto parts and electronics (e.g., smartphones) to the tariff list will hit American industry harder than before.

I expect a full-throated backlash from American companies that depend on imports from China, especially durable goods manufacturing and electronics. However, the considerable discretion that Section 301 (the authority for the China tariffs) and Section 232 (the steel and aluminum and perhaps soon autos and auto parts) give to the president will make it difficult to stop the new levies. Let’s hope there is a deal this week, but it’s necessary to prepare for the eventuality of an escalating tariff war.

Lewis Leibowitz

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