A Major Threat to Our Economy—Trump’s Trade War With China Is Neither Good nor Easy to Win

COMMENTARY Trade

A Major Threat to Our Economy—Trump’s Trade War With China Is Neither Good nor Easy to Win

Oct 1st, 2019 3 min read
COMMENTARY BY
Riley Walters

Policy Analyst, Asia Economy and Technology

Riley Walters is policy analyst, Asia Economy and Technology in The Heritage Foundation’s Asian Studies Center.
More than 80 percent of the American businesses that actually operate in China say they have no plans to move out of China. Oleg Elkov/Getty Images

Key Takeaways

Now, weaker economic data is coming not just from China but from the U.S. as well.

Historically, the U.S. is the second-largest investor in China, with direct investment totaling $117 billion.

As much as some would like to see the U.S. “win” a trade war, or Americans and Chinese stop doing business with each other, the numbers suggest that’s not happening.

If the last two years have taught us anything, it’s that trade wars are neither good nor easy to win.

Supporters of the Trump administration’s tariff tactics continue to assure us that China will ultimately change its bad behaviors, and at little cost to the U.S. Now, however, weaker economic data is coming not just from China but from the U.S. as well.

Two separate surveys of the U.S. Purchasing Manager Index, an indicator for manufacturing employment and output, are now seeing a contraction, or close to it, for the first time in more than three years.

Businesses cite slowing global demand, a shift in supply chains, and increasing uncertainty in U.S.-China economic relations, as reasons why the U.S. might continue to see slower economic growth in the second half of 2019.

Researchers from the Federal Reserve Board estimate that trade uncertainty has already cost the U.S. as much as 0.8 percent of GDP. That’s because tariffs are taxes, and American businesses and consumers are paying higher taxes every day.

The latest increase of tariffs came on Sept. 1. Two more increases are scheduled for later this year, on Oct. 15 and Dec. 15.

The passionate supporters of tariffs argue that the aim should be not just to change China, but to encourage Americans to stop doing business in China altogether. They suggest that American businesses can simply find alternative suppliers in countries like Vietnam or Mexico.

However, the reality isn’t as simple as moving pieces on a chessboard. The numbers reflect what businesses already know: that you can’t just pack up and move production on command.

Since the Trump administration began placing tariffs on $250 billion worth of goods coming from China, it has also granted hundreds of exemptions from these tariffs for Americans who can’t find alternative suppliers outside of China.

The White House claims the tariffs have been an immense cost to the Chinese economy and are being paid for by China, but roughly $20 billion worth of products are exempt from these taxes because they would be too costly for American businesses to go without.

Just a few months ago, the Trump administration announced tariffs for a separate $300 billion worth of goods coming from China. But shortly after, the tax on half this amount was delayed out of fear of cutting into Christmas shopping.

Specific products like pharmaceuticals, pharmaceuticals inputs, select medical goods, rare earth materials and critical minerals were exempt from tariffs altogether.

Of course, there are those that aren’t exempt from the tariffs. And because they aren’t able to find alternative suppliers outside of China either, they’re stuck paying the price – more than $20 billion in additional taxes over the last year.

Overall, trade between the two nations has declined but not enough to displace China as one of the U.S.’s top trading partners. U.S. goods imports from China are down 12 percent from last year, and exports are down 18 percent. But the U.S. and China are looking to do $570 billion worth of trade in 2019, compared to the $660 billion worth of trade in 2018.

If there’s a silver lining to all of this U.S.-China trade turbulence it’s that it’s unlikely to cause a U.S. or Chinese recession. That’s because total trade with China makes up only 3.6 percent of U.S. GDP; trade with the U.S. makes up only 5.4 percent of China’s GDP.

It bears noting, however, that business with China isn’t just about trade, it also includes investment.

Recent reports suggest U.S. business investment in China isn’t slowing, despite the tariffs. In fact, investment in China is growing. U.S. businesses have already invested $6.8 billion in China this year, up 1.5 percent from a year ago.

More than 80 percent of the American businesses that actually operate in China say they have no plans to move out of China. They also have no plans to reduce their investments in China.

Historically, the U.S. is the second-largest investor in China, with direct investment totaling $117 billion.

As much as some would like to see the U.S. “win” a trade war, or Americans and Chinese stop doing business with each other, the numbers suggest that’s not happening.

Until President Trump gets what he wants, nothing is certain but more trade uncertainty.

This piece originally appeared in Fox Business