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Economy Kushay's Matter Bank

[AK] Economic Arguments For and Against Trade War

This note will discuss the economic impacts of the US trade war and provide perspectives saying that it’s a failure and a success.

Perspective saying the trade war is a success:

US’ trade war targets highly elastic imports (highly elastic means the demand for the product easily changes as prices changes) (look up “economic elasticity” on Google). This means that Chinese exporters have two options:

– Increase sell price to cover up the losses from having to pay tariff, but risk losing market since the goods become more expensive

– Don’t increase sell price, but have to suffer losses

Option one isn’t feasible, or else suppliers are going to move away from China: e.g. Textiles, US importers move from China to Turkey, India, and Mexico. So the cost of tariff are borne by Chinese producers and distributors. US has little tax, its economy is consumption-driven and so has very big market. This is too much for China to abandon. Moreover, the money obtained from tariffs directly goes to US treasury, increasing government cash.

A way to circumvent tariffs are attempted via “transshipment” (the act of product recertification, and make it as if the products don’t come from China) fails, because it is costly to have to move goods somewhere else before to US,  there are negotiations to prevent this from happening.

Fact-wise, Chinese economy weakening, with its growth declining from 6.6% to 6.5%. The efforts they do to counter that are looser monetary policy, tax cuts, and spending in infrastructure.

Perspective saying the trade war is a failure:

1. Chinese exports often have big value-added from other countries, since in the modern economy supply chain crosses multiple borders. For example, the electronics China exports are made from metals coming from developing countries. So, if Chinese electronic exports is reduced, developing countries’ metal exports is also reduced and they suffer.

2. Even if it is not, the goods exported often comes from MNCs operating in China, so the MNC countries’ origin is also going to be harmed.

3. The Chinese also retaliates by imposing tariffs on soybean and airplanes imported from US; this harms soybean farmers and pork farmers.

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