By Alan Beaulieu on Sep 14, 2018 3:10:00 PM
Having already set tariffs on $50 billion worth of Chinese imports, President Trump is thinking about imposing 25% tariffs on another $200 billion in Chinese goods. China said it would reciprocate if that happens, with 25% tariffs on about $60 billion in US goods, including items such as meat, coffee, nuts, and auto parts. Given the potential loss of business with the US, China has already reduced its taxes by approximately $10 billion as a means to stimulate portions of its economy. China does not appear ready to acquiesce easily to US trade-policy demands.
The President had initially proposed a 10% tariff but recently increased it to 25%, and it is not hard to understand why. Since the January high-water mark, the renminbi (RMB) has decreased 9.03% in value, no doubt driven by market and internal pressures. That amount of devaluation nearly offsets the impact of a 10% tariff; a 25% tariff on $200 billion worth of goods carries a lot more punch.
Compared to the earlier $50 billion in goods, much of this $200-billion round pertains to consumer goods; therefore, unless the supply chain absorbs the increase, consumers will be footing the bill. We can expect at least two impacts: one, inflation; and two, a demand-shift away from Chinese-made goods, to the extent consumers have options and decide to move to different price points.
Domestic producers of substitute consumer goods as well as the commercial/industrial goods on the $200-billion list will no doubt welcome the opportunity to expand market share, boost prices, and secure or increase profitability. Importers, on the other hand, will face pricing pressures that could lead to declining sales or, at the very least, margin pressure. Portions of the motorcycle industry, food equipment manufacturers, and chemical companies have expressed opposition to the proposed new round of tariffs.
The unknown here is how much weight will fall: on taxpayers, via the cost of government subsidies (bailouts) and increased federal debt; on consumers, via price increases; and on businesses, via reduced profits, which could in turn lead to reduced tax revenue at the state and local levels. Some firms and people will win; others will feel some pain. We think the downside pressures felt by consumers and businesses will combine to slow the GDP rates of growth in both the US and China in 2019.