One of the most criticized proposals in Trump’s presidential election program is the strengthening of the trade war with the United States. introduction of general tariffs of 10%rising to 60% in the case of imports of Chinese products.
The justification for the introduction of high tariffs on China is based on a concept of national security, attempting to transfer the production of strategic goods on North American soilor to friendly countries (friend-shoring). This measure cannot be understood without knowing the Chinese strategic plan “Made in China 2025” launched in 2015.
It should be remembered that China has been heavily subsidizing many sectors for at least a decade. The “Made in China 2025” plan predicted that by that year, China would be a world leader in at least ten sectors. Among them: information technology, new materials, numerical control and robotics toolsenergy saving, new energy vehicles and aerospace equipment. The plan called for 40% of basic components of production to be local by 2020, increasing this percentage to 70% by 2025.
The United States seeks to prevent China from assuming a dominant position globally in sectors that may be sensitive to national security. This has already happened in sectors such as electric vehicle, solar panel construction or the processing of rare earths.
Interestingly, some of the reasons that pushed China to implement such a plan are the same ones that Trump has given in favor of increasing tariffs on China:
“China is concerned about its national security and needs local information technology, because every IBM chip or Cisco phone system represents a security risk. China lacks advanced technologies in many areasand depends on basic goods for its infrastructure, so manufacturing advanced technologies becomes a security issue.
The main criticism of the possible implementation of Trump’s proposed tariffs concerns their effect on rising consumer prices and, consequently, on US inflation. This potential effect must be qualified.
First, the United States has a free trade agreement with Mexico, Canada (USMCA) and 18 other countries. Presumably, the new tariffs would not apply to these countries.
According to Trump’s responses to a lengthy interview with Bloomberg last July, the new tariffs are not only aimed at China, but also at American companies that have has relocated the production of its products outside the United Statesmainly in China. This is the case with Apple, among others.
Regarding the increase in inflation due to the introduction of new tariffs, the experience of 2018 allows us to draw conclusions other than those that are simply intuitive. In 2018, the introduction of heavy customs duties by the United States on certain Chinese products did not cause an increase in inflation. Chinese export companies, instead of maintaining sales prices and force the importer to pass on the tariff on the price to be paid by the consumer, they preferred to reduce their margins and absorb between 75% and 81% of the tariffs by reducing their margins. The result was that the consumer price hardly increased and the margins of Chinese exporters were reduced. As a result, inflation did not increase.
The tariffs now announced represent an increase in the tariffs already in force. Due to Chinese overcapacity in many sectors, the Asian giant is forced to export at all costs. Indeed, during this year 2024, China has increased its exports, but with a price reduction of almost 25%The main victim of the new tariffs will be China, not the American consumer. Moreover, a stronger dollar would make imports cheaper, helping to prevent consumer prices from rising.
The effect of the new tariffs, if implemented, is uncertain, but in any event there are reasons to believe that a large proportion of them will cut into exporters’ profit margins and that some may be offset by a possible strengthening of the dollarThis could have an effect on inflation, but less than initially estimated.
Even though Trump is more belligerent in his campaign on tariffs on China, the Biden administration has maintained the tariffs imposed by Trump and even increased them considerably on some products (100% tariff on Chinese electric vehicles). The trade war with China seems inevitable. It remains to be seen how intense it will be depending on the election result.
