Why the U.S. tariff threat is futile

Why the U.S. tariff threat is futile

Why the U.S. tariff threat is futile

Trade conflicts are nothing new in U.S. economic history, and they invariably go through the same tired cycle. Initially the United States intended to limit competition and bulwark its economy, but quickly ended up damaging the wider economy.

The Great Depression of the 1930s is a perfect case in point. Under economic pressure, President Herbert Hoover signed the Smoot-Hawley Tariff Act into law, increasing tariffs on more than 20,000 imported goods, which soon drew retaliatory duties from several outraged U.S. trading partners. Consequently, the U.S. imports and exports slumped by more than 60 percent, exacerbating the depression and damaging the global economy.

In the past three decades, U.S. trade conflicts focused on several areas, including bananas, wood, steel and tyres. But higher tariffs on those goods never fixed the U.S. economy, and instead made all parties worse off.

What’s past is prologue.

The United States has launched the largest trade war in economic history. To “make America great again,” it hopes to eliminate the trade deficit with China as it deems it detrimental to the U.S. economy.

However, China and the United States give very different numbers on what the trade deficit actually is. According to U.S. Census Bureau data, the trade deficit with China ran to a record 375 billion U.S. dollars in 2017, while China’s customs calculates the country’s surplus with the United States at 275 billion dollars.

“Statistical discrepancies have inflated the U.S. calculation of its trade deficit with China by about 20 percent every year,” according to Zhong Shan, China’s minister of commerce.

An iPhone, for example, plays a significant role in skewing the apparent U.S. trade deficit with China. On the surface, the deficit appears to be 375 billion dollars, with the iPhone series alone accounting for around 4.4 percent of that, but the true figure is far lower.

Because iPhones are assembled in China, the headline numbers count almost the entire manufacturing cost of an iPhone, while in reality very little of that money is spent in China.

According to IHS Markit, an iPhone’s components cost a total of 370.25 dollars. Of that, 110 dollars goes to Samsung Electronics in the Republic of Korea (ROK) for supplying displays. Another 44.45 dollars goes to Japan’s Toshiba Corp and the ROK’s SK Hynix for memory chips.

Other suppliers from the United States and Europe also take their portion, while assembly, by contract manufacturers in China like Foxconn, represents only an estimated 3 to 6 percent of the manufacturing cost.

In this typical case, is it fair to claim that China seizes all the trade surplus in its iPhone exports to the United States?

The United States has a problem, but it is not with China, it is at home, according to Joseph Stiglitz, a Nobel Prize-winning American economist. “America has been saving too little,” he wrote in his recent article, indicating that U.S. policymakers should do what they could to increase national savings for reducing the multilateral trade deficit if they had a whit of understanding of economics and a long-term vision.

He said that significantly reducing the bilateral trade deficit in a meaningful way would prove difficult, and that China’s overall trade balance, like that of the United States, was determined by macroeconomics.

The U.S. imposition of tariffs on 50 billion U.S. dollars of imports from China has already backfired.

The U.S. overall trade deficit increased 7.3 percent in June, according to the U.S. Commerce Department. It is on track to hit a 10-year high.

Spanning nearly 40 years of diplomatic relations, trade conflicts are nothing new between China and the United States. History has shown the two countries have never run short of meaningful ways to navigate choppy waters.

One conflict dates back to the 1980s when the two economies became fractious over textiles. After the two sides settled an agreement through negotiation and Chinese businessmen even opened textile mills in the United States, the textile industry actually became a terrain that had created more manufacturing jobs in the United States and generated more cooperation than confrontation.

History and statistics have shown that waging a trade war is futile in the end. All the United States needs is to make a wise option.

Manjula

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