Louis DeBroux / August 28, 2019

Tariffs Cost Both Sides, but China Is Taking the Biggest Hit

The president’s policies are hurting American consumers. Yet he has a goal in mind.

President Donald Trump is playing a dangerous game with the global economy in order to do what should have been done decades ago; reign in the Communist Chinese government’s unfair trade practices.

China has repeatedly refused to act in good faith, blocking or heavily restricting U.S. access to Chinese domestic markets. Beijing has further discouraged foreign imports through a series of tariffs, subsidies, and other barriers to free trade, like its history of currency manipulation, artificially devaluing the yuan in order to make Chinese goods cheaper in the U.S.

Arguably the most damaging tactic used by the Chinese government is industrial espionage and theft of intellectual property. In addition to corporate espionage, the Chinese government, as a precondition for gaining access to Chinese markets, forces foreign companies to hand over intellectual property (inventions, designs, and other “creations of the mind”), passing it along to Chinese companies, which then produce cheaper knock-offs that directly compete with the foreign company.

The U.S. Trade Representative has estimated that America loses as much as $600 billion per year due to intellectual property theft by China.

Enter President Trump, who made immigration enforcement and renegotiating fairer trade deals the centerpieces of his 2016 presidential campaign.

If the official numbers are to be believed, the Chinese economy ($13.4 trillion GDP) ranks second globally behind the U.S. ($20.5 trillion GDP). However, there are a couple of caveats.

One, the Chinese economy, at a third smaller than the U.S., is spread out over four times the population. That population is aging faster than the American population, which means in the coming years it will be less productive and more expensive to care for.

Second, a recent, in-depth analysis by five economists from the Chinese University of Hong Kong and the University of Chicago found the Chinese have been over-reporting economic growth by an average of 1.7% per year for at least a dozen years, meaning the Chinese economy is roughly 20% smaller than officially reported.

And you can be absolutely certain that President Trump is aware of this and much more in his negotiations with China, which have been chaotic and tumultuous of late.

One day President Trump is praising Chinese President Xi Jinping, the next calling him an “enemy.” Such hyperbolic and inflammatory rhetoric is part of the “whiplash” strategy that Trump says is his M.O., but it sends waves of panic through economic markets. Trump’s recent demand that U.S. companies pull out of China made for even more uncertainty.

Then, of course, we have escalating tariffs.

In early 2018, President Trump levied $9 billion in tariffs on imports such as solar products and large appliances, months later adding $25 billion in new tariffs on steel and aluminum imports. Then, in the last year, Mr. Trump targeted another $200 billion in imports from China for tariffs, with another $300 billion targeted by the end of 2019.

To state the obvious, tariffs are bad. They drag down economic growth by taxing American consumers, who are spending more in the form of higher-priced imports, reducing their purchasing power. The damage is compounded by increasing uncertainty in economic markets, which sidelines capital and reduces investment, and therefore job creation and economic growth. Retaliatory actions taken by China are another painful blow.

The U.S. trade deficit with China was roughly $420 billion in 2018, but trade deficits are not necessarily bad. Most of us have a “trade deficit” with Walmart and Amazon, but because their lower-priced goods allow us greater purchasing power, our lives are considerably better for the arrangement. With China, the issue is not so much the trade deficit as the unfair practices that drive it.

President Trump claims we are winning the trade war, but in a trade war even winning is painful. It is the economic equivalent of chemotherapy — painful and destructive, but the hope is you purge the disease (in this case, China’s unfair trade practices) while harming the patient as little possible.

The president is well aware of this, as evidenced by his recent admission of second thoughts about the trade war, and the acknowledgment it could lead to a short recession. The Congressional Budget Office predicts the average American family will pay an extra $580 for goods next year due to the trade war.

President Trump feels he has a very strong hand, touting a new U.S.-Mexico-Canada trade agreement that is a net benefit for the U.S., and hinting that a new U.S.-Japan trade agreement will be announced soon. Plus the fact that the U.S. is far and away the world’s most powerful economy.

After Chinese Vice Premier Liu He was quoted as saying “an escalation of the trade war is against the interest of China, the U.S. and the entire world,” President Trump said we are “winning” the trade war. He appears confident China will be ready to make a deal soon, saying, “I don’t think they have a choice.” On Monday, he praised President Xi as “a great leader,” adding that “one of the reasons that China is a great country is they understand how life works.”

While even top Democrats agree this trade war with China is necessary to force China to act in good faith, it will be better for all when it is over. Previous tariff skirmishes under Presidents George W. Bush and Barack Obama resulted in higher prices for American consumers, lost jobs, and slower economic growth.

And that benefits no one unless the results of the fight recoup the cost.

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