Since our last class, the US imposed 10% tariffs on $200 billion of Chinese imports, and China retaliated by imposing tariffs on $60 billion of US imports, This is the second round of tariffs; in the first round both countries imposed tariffs on $50 billion of imports.
What is going on? US have been for a long time complaining about Chinese unfair trade practices. They involve forced technology transfers in joint ventures, various obstacles to trade and, some time ago, an undervalued currency. The US has a large trade deficit with China: exports are $130 billion and imports are $505 billion. This explains why Chinese retaliatory tariffs are on a smaller volume of trade: there is just not enough imports from the US.
What do tariffs do? Exporting firms can either reduce margins, or raise prices, or use a combination of both. For Chinese firms, raising prices is likely as they are very competitive and operate with low margins. They can also try to move production to another country, and there has been talk about Chinese assembly plants moving to Vietnam and Thailand. But moving production would take time, while the tariffs may be removed if an agreement is reached. So in the short run you can expect prices of products imported from China to rise. Note that US announced that if there is no change by January 1, tariffs increase to 25%; they are also threatening imposing tariffs on, essentially, all imports from China.
Needless to say, this is unprecedented. US and China are the two biggest economies in the world.
How will it all end? It is difficult to say. US has the advantage because its imports from China are so large (four times bigger than exports). But China is not a democracy, and the government is able to tolerate more damage to the economy from the trade war, while the US government will be under pressure from both importers (Walmart!) and exporters (farmers, car companies). And there is an election in 50 days.
No comments:
Post a Comment