Mary E. Lovely is a professor of economics at Syracuse University and non-resident senior fellow at the Peterson Institute for International Economics. The opinions expressed in this commentary are her own.
As the United States and China prepare to resume talks later this month, hopes run high that there will soon be an end to the destructive trade war between the two nations. Given how difficult it's proving to achieve lasting reform of China's industrial and technology policies, it's unlikely a long-term resolution will be reached this month. Indeed, President Trump recently softened his stance and agreed to consider an interim deal, presumably one that revives US agricultural exports but falls short on fundamental Chinese reforms.
Trump badly needs a deal that removes him from the tightening noose in which he now finds himself. From here forward, further ratcheting up the trade war will bring visible pain to American households, with implications for his re-election chances next year.
Fallout from the trade war so far has been painful, but manageable. Grain farmers are the biggest losers to date. Exports of soybeans to China in 2018 fell by 74% from the year before. The administration has been able to palliate the side effects with $24.5 billion in aid so far, but further funds depend, in part, on the willingness of the Democratic-controlled House of Representatives.
And until recently, consumers have been spared. Trump's China tariffs have fallen mainly on imported goods used in industrial production with minimal direct hits to consumers. Analysis by Chad Bown of the Peterson Institute for International Economics finds that 82% of parts and supplies that US-based businesses buy from China were subject to tariffs before September 2019, while only 29% of final consumer goods were similarly taxed. Tax rates also have been kept fairly low until recently, rising to 25% from 10% for most targeted goods only in June of this year, delaying the pain felt even by producers. Through these choices, the impact of the trade war has been hidden from voters in the vast supply chains that feed American production.
The most politically salient trade war damage lies ahead, unless the United States and China reach a deal. The Trump administration strategically backloaded the pain for consumers, but such cherrypicking is no longer possible now that the United States plans to tax almost all US imports from China.
In August, the president announced the final list of goods to be taxed and then decided the new tariffs would be implemented in two rounds. The first round, which took effect on September 1, placed 15% tariffs on an estimated $110 billion of imports, including almost all clothing and accessories and half of the footwear Americans buy from China. The factories behind these products, mainly small Chinese factories with low profit margins, cannot absorb the tariffs by lowering their prices even as their American customers ask for such discounts. While US importers search for alternative suppliers in other parts of Asia, it is American families who will bear the inevitably higher production costs.
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The second round of remaining tariffs, if greenlighted, will be an even bigger political nightmare for the administration. My own research shows that about 60% of the estimated $160 billion of imports scheduled to be implemented on December 15 will be computers and other electronic devices. Unlike earlier rounds, which raised the cost of equipment rarely purchased directly by consumers, such as power cords and routers, the upcoming round hits the devices that Americans hold to their ears and cradle on their laps — smartphones, tablets and laptops. In fact, my own research shows that cell phones and laptops account for 54% of all imports scheduled to be taxed in December.
If these tariffs on phones and laptops are implemented, there are several scenarios for who bears the burden — and none of them will be palatable to the Trump administration. First, some of the cost of the tariffs may be shifted back to subcontractors in China. However, my research shows that almost all these manufacturers are non-Chinese-owned multinationals operating in China, such as the Taiwanese firm Foxconn. Any pain they feel will do little to motivate Chinese reforms and will further irritate relations with allies.
The second possibility is that these suppliers cannot reduce their prices enough to compensate for the new tariffs and that American businesses and households will simply be forced to pony up more for the phones, laptops and tablets on which modern life now relies. Retailers will lay the reason for higher prices at President Trump's door.
A final possibility is that American tech companies who use Chinese-based subcontractors — as do Apple, Dell, HP and Microsoft, among others — will bear the pain of the tariffs by taking a hit to profits. If US customers are unwilling to pay higher prices for devices like the iPhone and instead switch to devices not assembled in China, companies such as Apple will be unable to raise prices. The tariffs, in this case, will erode US tech sector profit margins. Before we cheer the fact that this means pain for companies outsourcing to China, remember that Samsung, a South Korean company, makes popular smartphones, and will likely remain untaxed because it assembles phones in countries other than China. How likely is President Trump to be congratulated for sending Apple sales down and Samsung sales up? No matter how many Americans think US tech companies are too big or too rich, few think it wise to shift sales to a foreign company that is just as big and rich.
The Trump administration may have thought its trade war with China would never come down to taxing Americans' purchases of clothing, shoes, toys, phones and laptops. Sadly, seemingly endless rounds of negotiations have brought us to this point. There is no place left to hide the rising costs for Americans. President Trump may soon decide that it's time to make a deal.
