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BOHANON & CUROTT: We’re about to feel pain of trade war with China

September 28, 2018

Economic Analysis by Cecil Bohanon & Nick CurottWatching recent developments in the U.S. trade war with China has been like watching a minor traffic accident escalate into a multi-car pileup. What began earlier this year as tariffs on $50 billion worth of imported Chinese steel and aluminum has ballooned to tariffs on $200 billion worth of Chinese imports.

Effective Sept. 24, the United States is levying a 10 percent tax on a dizzying array of more than 6,000 categories of Chinese goods—a tax that could rise to 25 percent. Everything from electronics and appliances to lumber, cars and building materials is about to get more expensive.

American consumers buy manufactured goods made in China for the same reason they buy bananas from Guatemala—because China is the most-efficient, lowest-cost producer of these items. Tariffs on Chinese imports are, in effect, just a tax on the American consumers of these products. As mentioned, this will cause prices paid by consumers to rise.

More important, but less obvious, it will cause U.S. gross domestic product to fall. Americans will be forced to produce for themselves goods that could be more cheaply obtained through trade with China. This makes about as much economic sense as growing bananas in Indiana, when it is more cost-effective to grow soybeans and trade them for Guatemalan bananas.

Forecasters are already predicting slightly higher inflation and slower GDP growth next year because of the latest tariffs. Even more concerning is how quickly the trade war is escalating. China has responded with a new round of tariffs on 5,207 American goods, even though President Trump said he would “immediately” place tariffs on another $267 billion worth of imports if China retaliated.

The White House is painting the trade war as temporary pain necessary to gain concessions from China. However, it will be far more difficult to remove the tariffs than it was to put them on. Domestic industries protected by tariffs have a special privilege they jealously guard. As the tariffs become the key to their profitability, they will certainly increase their lobbying and campaign-finance contributions to protect their privilege.

Securing relatively free international trade took decades, and now it’s under threat. While estimates vary, a full-blown international trade war could slow GDP growth as much as 1 percent.

Who is willing to risk a 1 percent decline in real income for whatever concessions Trump might—but probably won’t—extract from China? We sure aren’t.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

 

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