Impact of China/ US Tariff Trade War
Commercial ties between the USA and China have been marked by complexity and increased contentions because of trade war on trade policies. On one hand, the trump administration have publicly declared its intention to take a hard line on trade policies towards China as Trump’s administration have blamed China for its slow growth in GDP, weak employment growth and net loss in manufacturing following China’s ascension to WTO. On the other hand, China retaliated by announcing increased tariffs on a set of imports including American cars. While President Trump administration is positive that China will reduce and eventually remove the 40% tariffs it placed on US cars imported into China, China has remained silent even as analysts have been quick to point out that the tariff is overblown and that the impact of the same will be negative. For the most part, economist warns that Trumps’ tariffs as well as the retaliatory tariffs are likely to affect the economy in a number of ways. At the most basic level, tariffs directly accelerate prices of goods (Krugman et al., 2012).
Impact of Tariff on the Economy
Ideally, tariffs are placed on imported goods to benefit domestic companies by making their products relatively affordable than those of their foreign counterparts (Krugman et al., 2012).Tariffs have the effect of increasing the price of the given commodity in a country. As in this case, China imposing high tariff on USA imports will have the corresponding effect of increasing price of USA cars and decreasing the volume of the imports.
Figure 1: China’s Domestic Car Market
At the normal tariff levels domestic supply is represented by SS and the demand by DD. The price the buyers are willing to buy products from the world market stands at P0 and of the quantity of goods the buyers can buy is represented by is Qo.
Suppose then that higher tariffs are introduced the effect would be that the prices will increase from normal tariff P0 to P1, because the prices have increased less buyers will be willing to buy imported cars from the USA. Consequently, the demand for USA cars will also decrease from DD to D1 as the supply in the home market will increase and shift from SS to SS1 as more manufacturers from the domestic market will be willing to manufacture cars. This shall be followed by an increase in the quantity supplied from Q0 to Q2* at a relatively lower price from the price (P2) of the imports from the USA. At the same time, taxes could lead to high prices for consumers as well as manufacturers. Manufacturers are also are ambivalent apart from the concern of prices manufacturers are concerned of resulting layoffs and loss and not actually creation of jobs that Trump’s administration hope to create (Strauss, 2018).
Ideally, if tariffs imposed on cars imported from the USA are high, buyers in China will purchase cars from China and in so doing benefit the Chinese economy and overall job market.As it pertains to our case, tax impositions by the Chinese government raising taxes may perhaps achieve its protectionism policy as higher prices, will theoretically enable manufacturers to be profitable and thereby invest more in factories and workers. Similarly, the government can raise revenues from increased sales from local manufacturers. Overall price rise from P0 to P1 for domestic manufactures may also be as a result of domestic manufacturers who may take advantage of higher prices (P2) that has resulted from the imports.
In conclusion, critics are wary that trade rifts between the US and China will boomerang back to hurt the US economy and although we may argue that Trump’s administration has taken an overly stern measure on China, it is also important to note that Chinas rise may have been driven by its historical protectionist policies. As such it is fathomable that this may be the only realistic path to addressing the carnage that China has brought. If China has been able to use protectionism policies to protect its economy then why can’t the US follow in the same trend to protect its economy? Unless, the US stands up against Chinas trade discriminatory policies, practices and acts then Americans are likely to suffer at the expense of a growing county. On the other hand however it is important to think of the effect that these taxes may have on the US economy, customers, and overall productivity. From the above analysis it is clear that the effects will be felt in nearly all the sectors.
BBB. (2018). Trump says China agreed to reduce tariffs on US car imports. BBC. Retrieved from https://www.bbc.com/news/business-46422320
Krugman, Paul R., Maurice Obstfeld, and Marc Melitz. 2012. International Economics: Theory and Policy. Boston: Pearson Addison-Wesley.
Strauss, D. (August 17, 2018).What are the economic consequences of Donald Trump’s trade wars? Financial Times. Retrieved from https://www.ft.com/content/ec8f616e-9fd9-11e8-85da-eeb7a9ce36e4
Kiersz, A., & Bryan, B. ( Oct. 12, 2018, 1:35 PM). Here’s exactly how Trump’s trade war with China could affect you. Business Insider. Retrieved from http://uk.businessinsider.com/trump-trade-war-tariffs-china-effect-2018-10?r=US&IR=T