Since 2018, the two leading economies, China and the United States, have been embroiled in an economic war. In August 2019, the United States announced the third of a series of tariffs on goods coming from China. The selected article by Li (2019), indicates that the announcement declares the US administration’s imposition of a 10% tariff on $200 worth of goods coming from China (Li, 2019). This and preceding tariffs followed a United States Trade Representative report incriminating China in unfair trade practices (Office of the United States Trade Representative, 2019). These planned tariffs are likely to reduce economic output, consumption, investment, real wages, and work effort while triggering an increase in interest rates.
Tariffs and associated taxes are ultimately borne by producers in the form of higher input prices. For example, companies relying on Chinese raw materials or product components are likely to incur higher costs after the imposition of these tariffs. It is estimated that pushing through with the planned tariffs will produce a 0.07 percent ($17.8 billion) fall in the total value of goods and services produced (GDP) in the US (York, 2019). Most importantly, trade barriers in the form of tariffs imposed against goods imported from China will trigger retaliatory tariffs. Unlike the tariffs announced by the US, the retaliatory tariffs will not earn the US any form of revenue.
Tariffs against Chinese goods will also adversely affect consumption and investment. One of the significantly pronounced outcomes of tariffs is the reduction of income and employment due to falls in output. Trump’s tariffs announced by the US are expected to produce close to $105 billion every year (York, 2019). It is important to note that the burden of tariffs falls largely on the US economy. Subsequently, these costs along with retaliatory tariffs will impact on the equivalent of an estimated 55,300 full-time jobs. The combination of higher prices and loss of jobs compromise consumer spending (York, 2019). The impact of tariffs on consumption extends to the levels of investment in the economy. The fact that higher prices make it difficult for consumers to purchase products and services means that exporters have lower returns that can be ploughed back into investments.
The eroded performance of the domestic business that accompanies tariffs creates a fall in the real wages and lowers work incentives. As stated earlier, the announced tariff changes will trigger a close to $20 billion fall in GDP. Wages and equivalent full-time equivalent jobs are then expected to fall. In such a scenario, the owners of capital and the labor force would receive lower incomes. These lower incomes would act as a diminished incentive for people to work. To address this decline in the domestic economy, the Federal Reserve Bank (the Fed) will adjust the interest rate to avail the capital to stimulate investment and grow the economy. More specifically, the effects of the August tariffs may compel the Fed to adjust the interest rate downwards as a way of encouraging borrowing, investment, and economic growth.
The US and China’s trade war, defined by tariffs and counter-tariffs, such as that announced by the US on in August 2019 lower output, consumption, investment, real wages, and work effort while triggering an increase in interest rates. The bulk of the effects of announced tariffs revolve around the reduced capacity for domestic companies to make revenue. The attempts to control China’s perceived unfair trade policies may inadvertently introduce economic hurdles for the US economy.
References
Li, Y. (1 Aug, 2019). Trump says US will impose 10% tariffs on another $300 billion of Chinese goods starting Sept. 1. CNBC. Retrieved from: https://www.cnbc.com/amp/2019/08/01/trump-says-us-will-impose-10percent-tariffs-on-300-billion-of-chinese-goods-starting-september-1.html
Office of the United States Trade Representative. (2019). Notice of Modification of Section 301 Action: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Federal Register, 84(161). Retrieved from: https://ustr.gov/sites/default/files/enforcement/301Investigations/Notice_of_Modification_%28List_4A_and_List_4B%29.pdf
York, E. (2019). Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions. Tax Foundation. Retrieved from: https://taxfoundation.org/tariffs-trump-trade-war/
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