Tag: China

Yes, Tariffs on Imports from China Are Taxes (Even When Absorbed by Business!)

Instead of entering what many anticipated would be the home stretch of negotiations to end the nearly yearlong trade war, U.S. tariffs on about $200 billion of imports from China are set to increase from 10 percent to 25 percent tomorrow morning. There is plenty of speculation as to what happened, who’s to blame, whether President Trump is engaging in negotiating tactics described in “The Art of the Deal,” and which economy is better situated to withstand a wider, longer trade war (as if a 10 percent economic contraction means victory if the other economy shrinks by 15 percent).

The most prominent explanation for the abrupt reversal is that U.S. negotiators learned that their Chinese interlocutors were backing away from previous commitments to resolve the forced technology transfer problem, which is one of the most important U.S. objectives in these talks. After mulling that development last weekend, Trump opted for escalation. He also promised that the balance of Chinese goods (another $250 billion of imports not yet tariffed) soon will be hit with rates of 25 percent, as well. In response, Beijing announced it will impose yet-to-be-specified countermeasures.

Interestingly, this week’s developments haven’t completely torpedoed the negotiations. A somewhat smaller (than originally planned) delegation of Chinese officials is in Washington for negotiations slated to begin at 5pm, which gives them exactly 7 hours to sort everything out before Trump’s higher tariffs take effect at the stroke of midnight. Don’t expect a comprehensive deal or even the contours of one to materialize, but with Chinese Vice Premier Liu He making the trip to Washington despite this latest upheaval, there is at least some hope that the actual tariff escalation will be deferred.

It turns out that the fine print in the Federal Register notice announcing the new rates states that products leaving China after 12:01, Friday, May 10, will be subject to the higher tariffs. It takes about two weeks for a cargo ship departing Shanghai to arrive in Long Beach, so negotiators really have seven hours, plus about two weeks, to reach a deal before Customs has to tax U.S. importers at the new, higher tariff rate. Of course, time is much shorter (seven hours plus about twelve hours!) for importers of high-value, fragile, and perishable products, which are typically transported by air.

As of this moment, the United States has punitive tariffs in place on approximately $250 billion of imports from China. Since last July, tariffs of 25 percent have been levied on imports that were valued collectively at about $50 billion in 2017. Nearly all of those goods are intermediate inputs or capital equipment—the purchases of U.S. producers. Trump advisor Peter Navarro was pleased to note at the time that, in selecting the products to target, he and colleagues used a special economic model to help them avoid burdening consumers by focusing on business purchases, as if businesses don’t pass their higher costs onto consumers in the form of higher prices or onto to their shareholders and workers in the form of lower profits. Thanks, Pete!

After Beijing retaliated, the Trump administration imposed 10 percent tariffs on an additional $200 billion of Chinese goods. This time, the majority of targeted products were consumer goods. It is this tranche of products for which tariffs are slated to increase to 25 percent at midnight. Makes one pine for the days when Navarro worried about consumers.

If matters aren’t resolved quickly, the likelihood is very high that all U.S. goods imports from China will be hit with tariffs of 25 percent.  Let me try to put that in some perspective.

In 2017 (before the punitive tariffs were in place), U.S. imports from China totaled $504 billion and duties paid to U.S. Customs amounted to $13.5 billion, which is an average applied tariff rate of 2.68 percent. Last year, when tariffs of 25 percent on $50 billion of Chinese goods were imposed in June and July, and additional tariffs of 10 percent on $200 billion of Chinese goods were imposed in late September, the value of imports from China totaled $543 billion and the duties collected came to $23 billion—an average applied tariff rate of 4.23 percent.  Nearly $10 billion of costs associated with the higher tariffs were imposed on consumers, businesses, shareholders, and employees.

It turns out that for many products Americans purchase from China, demand is fairly price inelastic. In other words, a one percent increase in price generates less than a one percent decline in quantity demanded. Total revenue rises. At least that is the case for broad swaths of products within the range of price increases attributable to the tariffs. Afterall, despite that tariffs, import value rose from $504 to $543 billion in 2018. Maybe there aren’t many substitute sources or the costs of finding substitutes and switching is too high relative to the tariffs.

A 25 percent across-the-board tariff could generate different effects. Demand may be more price elastic for more products at that price range. In other words, we will likely see a decline in import value from China if 25 percent tariffs are imposed. That means that the added costs directly attributable to the tariffs would not be 25 percent of $543 billion (the 2018 value), for example, because the value of imports will be lower. How much lower depends on these elasticities and other factors.  However, 25 percent of $543 billion is not an unreasonable, upper end estimate of the costs to U.S. consumers and businesses that would be attributable to a 25 percent across the board tariff. That’s $135 billion. That’s a cost of about $400 for every person in the United States. That’s a lot.

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Bad Policy Begets Insecurity

The New York Times is reporting a major spike in aggressive cyber attacks by Iran and China against businesses and government agencies in the United States. “[S]ecurity experts believe,” the Times reports, that the renewed cyber attacks “have been energized by President Trump’s withdrawal from the Iran nuclear deal last year and his trade conflicts with China.”

Chinese cyberespionage cooled four years ago after President Barack Obama and President Xi Jinping of China reached a landmark deal to stop hacks meant to steal trade secrets.

But the 2015 agreement appears to have been unofficially canceled amid the continuing trade tension between the United States and China, the intelligence officials and private security researchers said. Chinese hacks have returned to earlier levels, although they are now stealthier and more sophisticated.

…Threats from China and Iran never stopped entirely, but Iranian hackers became much less active after the nuclear deal was signed in 2015. And for about 18 months, intelligence officials concluded, Beijing backed off its 10-year online effort to steal trade secrets.

But Chinese hackers have resumed carrying out commercially motivated attacks…

In other words, the United States has been the target of major cyber attacks from both Iran and China as a direct consequence of two Trump administration policies, neither of which were justified.

Last year, against the advice of his own top national security officials and the US intelligence community, as well as US allies, President Trump withdrew from the 2015 Iran nuclear deal (JCPOA). That deal rolled back Iran’s nuclear program and imposed strict limits on it for the foreseeable future. To this day, it remains one of the most robust non-proliferation agreements ever negotiated and Iran continues to comply with its stringent controls and invasive inspections regime. Trump’s withdrawal, which lacked a national security rationale (at least one that had any relation to reality) resulted in the automatic re-imposition of harsh economic sanctions against Iran. Although the sanctions have hurt the Iranian economy, the regime in Tehran has kept to its obligations anyway, even amid threatening and overtly hostile rhetoric from the Trump administration that strongly suggests it is seeking regime change.

Many predicted withdrawal from the JCPOA would pressure Iran to unburden itself from the deal’s restrictions and restart its nuclear enrichment program in earnest, the exact opposite of the White House’s stated aim. Thankfully, this has not happened (yet). But what has happened is that Iran has ramped up aggressive cyber attacks against us.

Likewise, Trump’s determination to initiate a trade war with China, arguably America’s most important trade partner, cannot be justified on either economic or national security grounds. China’s immediate response was to retaliate with its own tariffs against US imports. Both the US and Chinese economies have consequently suffered an economic hit worth billions of dollars. We can add to these costs the apparent revocation of the arrangement Obama and Xi secured in 2015 not to engage in commercial cyber espionage. 

As I see it, we can draw two lessons from this. First, countries are likely to retaliate if we punish them for engaging in cooperative diplomacy with us. Second, Trump’s policies have made America less safe.

For those who think the proper response to intensified Iranian and Chinese cyber attacks is to adopt a more aggressive, offensive cyber posture (in retaliation for the retaliation), I recommend reading this Cato Policy Analysis we published last month which demonstrates the dangers, and low utility, of such a path.

U.S. Trade Policy Agenda in 2019? Fixing What’s Been Breaking Since January 20, 2017

Upon taking office in 2017, President Trump accused trade partners of underhandedness, demonized U.S. companies with foreign supply chains, and perpetuated the false narrative that trade is a zero-sum game requiring an “America First” agenda. He withdrew the United States from the Trans-Pacific Partnership, threatened to pull out of North American Free Trade Agreement and the Korea-U.S. Free Trade Agreement, and initiated a war of attrition against the World Trade Organization by refusing to endorse any new Appellate Body judges until his unspecified demands were met. Yet, those were still the halcyon days of trade.

In 2018, straining all credulity, the Trump administration dusted off a seldom-used law (Section 232 of the Trade Expansion Act of 1962) to impose tariffs on imported steel and aluminum from most countries on the basis that national security is threatened by U.S. dependence on foreign sources of these widely available commodities.

Later in the year, invoking another controversial U.S. trade statute (Section 301 of the Trade Act of 1974), which is widely considered an act of vigilantism under WTO rules, the administration announced tariffs on $50 billion worth of imports from China for alleged unfair practices, such as forced technology transfer and intellectual property theft. When Beijing retaliated with tariffs on U.S. agricultural products, Trump announced that he would hit another $200 billion of imports from China with tariffs. Once again, Beijing responded by broadening its list of targeted U.S. products and the president subsequently threatened to apply U.S. levies to all imports from China (over $500 billion in 2017).

To be fair, U.S. trade policy in 2018 wasn’t only rancor, hostage-taking, and trade war. Juxtaposed against this contentious, grievance-based, enforcement-oriented U.S. posture was some “trade liberalization.” Instead of withdrawing from NAFTA and KORUS, the Trump administration renegotiated both. Both included some liberalizing provisions, but also some lamentable, protectionist retrogression, which wasn’t totally unexpected given that, in both cases, U.S. insistence on renegotiation was motivated less by an interest in updating, expanding, and modernizing the agreements than by a desire to revise provisions that would—at least nominally—tilt the playing field in favor of U.S. workers and certain manufacturers.

As 2019 begins, five major issues cast long shadows over the trade policy landscape. First is whether and how the U.S.-China trade war will be contained, scaled back, and ultimately ended. Second is the looming possibility that the Trump administration will invoke national security to impose sweeping new tariffs on automobile imports. Third is the question of whether and when Congress will pass the implementing legislation for the new NAFTA (the United States-Mexico-Canada Agreement or USMCA). Fourth is whether, when, and how the crisis at the WTO will be resolved. And fifth concerns whether the Trump administration has the wherewithal to make good on its stated intentions of negotiating new trade agreements with Japan, the European Union, the Philippines, possibly the United Kingdom, and other countries. With much of the rest of the world moving forward with a slew of new trade agreements and the United States stuck on revamping old deals, the real and opportunity costs to U.S. businesses, consumers, and taxpayers continue to mount.

Throughout the year ahead, these major issues will be the predominant focus of the research and writing of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

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A New Cold War with China?

Picking up on Vice President Mike Pence’s speech at the Hudson Institute several weeks ago, Hudson’s Seth Cropsey detailed a plan in the Wall Street Journal on “How to Win a Cold War with Beijing.” At the center of Cropsey’s op-ed is a dramatic increase in the U.S. presence in Asia that would require, among other things, accelerating the current naval buildup, increasing naval patrols, and bolstering naval and Marine forces in Australia. In effect, Cropsey wants to apply the strategy that helped end the former Cold War to America’s growing conflict with China. Quoting Ronald Reagan, Cropsey explains “The objective in this strategic competition [is] ‘We win, they lose.’”

Cropsey’s approach, however, is based on several flawed assumptions, including about the inevitability of conflict between the United States and China. He also places undue faith in the United States’ capacity to face down its rising rival by building more warships and deploying them close to China’s shores.

Implicit in Cropsey’s call for a large naval arms race with China is the assumption that China will back down in the face of it. Convinced of the futility of such competition, Cropsey appears to believe, the Chinese will simply accede to our demands, including on Taiwan. But I have seen no evidence to support such an assumption. The more likely result of an arms race is…a further arms race, as my colleague John Glaser explained earlier this year. Cropsey also ignores the fact that the world is moving into an era of defense-dominance, which puts America’s exquisite, but enormously costly, naval platforms at increased risk from small, smart, and cheap weapons.

The current Sino-U.S. competition is unlike any we’ve seen – at least in a very long time. The Cold War was, in large part, a zero-sum fight between two diametrically opposed ideologies. However, whereas Soviet Communism and Western Capitalism couldn’t coexist, China’s and America’s current systems can. Or at least might.

If you doubt that, consider that Americans have helped to lift hundreds of millions of Chinese out of desperate poverty over the last quarter century through trade, greatly enriching China in the process. That wasn’t the intention, per se; as Adam Smith famously explained, trade is driven by mutual “self-love.” “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” he wrote, “but from their regard to their own interest.” 

Which U.S. Industries Will Bear the Brunt of Trump’s China Tariffs?

This morning, as anticipated, the Trump administration broadened the scope of its punitive tariffs on imports from China. The list of products subject to 25 percent duties increased from 818 to 1,097 harmonized tariff schedule (HTS) subheadings. Last year, the value of these imports from China amounted to roughly $50 billion, so the tax incidence (ceteris paribus), for the sake of the argument, will be roughly $12.5 billion. 

As expected, Beijing retaliated in kind, assessing similar duties on a commensurate value of U.S. exports, which is certain to cause revenues to fall for U.S. producers of the industrial goods and agricultural products subject to those retaliatory tariffs. But let’s not forget the adverse impact of our own tariffs on our own manufacturers, farmers, construction firms, transportation providers, miners, wholesalers, retailers, and just about every other sector of the U.S. economy.

About half the value of U.S. imports consists of intermediate goods (raw materials, industrial inputs, machine parts, etc.) and capital equipment. These are the purchases of U.S. businesses, not households. The vast majority of the Chinese products on the tariff list fit this description. They are nearly all inputs to U.S. production. By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers. Trump is raising the costs of production in the United States in sector after sector.

How significant is a roughly $12.5 billion tax in a $19 trillion economy? Well, not especially significant when put in that context. But that context masks the burdens directly imposed on the companies that rely on these inputs and indirectly imposed on their workers, vendors, suppliers, and downstream customers.

The Input-Output tables produced by the U.S. Bureau of Economic Analysis reveal—among other things—information about the relationships between industries in the United States. The “Use” tables map the output of all industries to their uses by other industries as inputs, as well as by end users.

The most recent “detailed” tables present the U.S. economy in 2007. The value of total commodity output at the time was $26.2 trillion, of which $14.5 trillion was consumed for end use and $11.7 trillion was consumed as intermediate inputs to further production. The $11.7 trillion dollar value of output from each of 389 industries (defined at the 6-digit NAICS level) is mapped to the input of each of the other 388 industries. In other words, $11.7 trillion of commodity output from 389 industries is simultaneously depicted as $11.7 trillion of intermediate inputs to 389 industries. Although the values of that industry-specific output and input certainly have changed over 10 years, it is not unreasonable to assume a roughly similar composition of input use on a percentage basis.  (Sure, production processes change and, consequently, the inputs demanded change too. But the 2007 table provides the best information available and it should produce some useful results.)

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The U.S. Trade Beef with China

The big picture of U.S. - China trade tensions can be difficult to sort out. How problematic are China’s trade practices, as compared to those of other countries? What is the appropriate U.S. government response? These are not easy questions to answer (although we do have some views).

Sometimes it can be helpful to focus on particular sectors instead. One such sector is beef, which U.S. farmers would like to export more of to China. At a recent Senate hearing, U.S. Trade Representative Robert Lighthizer was asked about this (starts around 20:00):

Sen. Jerry Moran: Let me get another question in before my time is fully expired. I applauded the administration for successfully concluded negotiations with China in 2017 to allow the US beef exports resumption into China after they were blocked in 2003. However, the 25% retaliatory tariff on US beef, which stems from the USTR 301 investigation, threatens to halt those exports and certainly any expansion. So on one hand, we had the opportunity to high five and brag about beef going to China. That seems – that opportunity seems to have disappeared and most concerning is what the growth potential that exists in China, what it does to our opportunities for increasing US beef sales.

Lighthizer: So, if I can, let me speak for a second about beef with China. I think it is a good example of what we are facing with China. So, the President’s strategy, as was the strategy of prior administrations, was to initially engage in a dialogue with China. We clearly have a chronic problem with China, we have a trade deficit with China, which was unsustainable, 375 billion dollars. A lot of which is not the result of real economics but really is a result of state capitalism. So, ten years ago as a result of negotiations because of their unfair practices, China agreed to allow US beef in certain circumstances, ten years ago. Over the course of the next ten years they didn’t let in beef because they made the promise but didn’t keep the promise. The President, during the 100-day period, when the President decided I will try a dialogue first, had that dialogue and as a result of that they agreed to let beef in. Let’s be clear though. The amount of beef – US beef that was eligible to come in was less than 3% of US production. So it wasn’t like it was going to be a panacea, although a lot of people thought it was. The result is that after the last time I saw the numbers, which were eight or nine months in, this was something like $60 million worth of beef sold in all of China. So I guess to me the China beef situation is more an example of what we’re facing with China than it is actually a solution. We really thought we would (a) be able to sell beef with hormones, the normal US production of beef into China for a long period of time. We don’t think they have a WTO right to keep us out. So while we made some headway in there, you’re right, they did take it away. That raises the question, this is going to be the question not with beef, but with all of the members and all of the retaliation, this may not be the appropriate time to raise it, I’ll do it on someone else’s time if you’d like, but we have to at some point discuss why we’re doing any of this. Because there clearly is pain associated with what we’re doing and the President is very sympathetic to not only cattle ranchers but to everyone else and a lot of ag but a lot of over people who are being, we believe, unfairly treated as a result of our attempt to really level the playing field.

Last year we wrote about the problems faced by U.S. beef exporters. (It’s worth noting that the 2003 ban mentioned by Senator Moran was in response to concerns about mad cow disease, and other countries also blocked U.S. beef exports). In our paper, we had some data showing how much beef imports into China have increased in recent years, and how well other countries were doing selling their beef in China:

 

Since we put together this data, China removed its ban on U.S. beef as part of a broader U.S.-China agreement, and U.S. exports of beef to China have grown. U.S. Meat Export Federation data show that, after the ban was lifted, there have been just over $60 million in sales of U.S. beef in China, over the past year or so. That figure matches pretty closely to the one Lighthizer referred to in his answer above. However, this figure is still dwarfed by the imports from other countries. As the table shows, imports come mostly from countries other than the United States. There are a number of reasons for the expansion of non-U.S. beef imports into China in recent years, but it is worth pointing out that Australia and New Zealand have a price advantage over their competitors, because those countries have negotiated trade agreements with China under which China cut its beef tariffs. Some of the other major beef exporting countries are also negotiating with China. Beyond tariffs, a trade negotiation provides a forum to talk about regulatory barriers.

If you don’t like numbers, we now have some visual evidence as well, as one of us (Huan) just went over to China, and while there she took a picture of the beef for sale in a Chinese grocery store in downtown Guangzhou, one of the most developed cities in China:  

 

This picture illustrates that imported beef is available for sale in China, but the market is dominated by non-U.S. beef. As can be seen in this picture, beef from Australia (indicated by an Australian flag and a yellow boundary) far exceeds the beef from anywhere else. Canadian beef (indicated by a red boundary) is a distant second. And American beef (indicated by a blue boundary) is pulling up the rear. 

When there is a situation where nobody can sell a product or service in China, it is clear that the problem is with China. But when other countries are selling a lot in China, it is worth thinking about what other countries are doing right and what the United States might need to improve.

Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

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