The Retired Investor: China Tariffs on Deck

The Biden administration is wrestling with whether to ease some of the Chinese import tariffs on billions of dollars of Chinese goods. If they do, it would mark the first step in reconciling the trade differences between the world's two largest economies and could even nudge down the inflation rate.

 

The trade war is now over four years old and substantial tariffs remain. "To what end," some may ask, as certain deadlines approach. The first tranche of the Section 301, China imports tariffs on $34 billions of goods, is set to expire this week. Another $16 billion worth of tariffs will expire on Aug. 23 followed by $100 billion of tariffs on Sept. 4.  

 

 You may recall that back in 2018, former President Donald Trump imposed a series of tariffs on a host of Chinese products totaling more than $450 billion. In response, China imposed their own tariffs on American goods. From there, as the rhetoric reached new heights, each side escalated the tariffs, encompassing more and more goods at higher and higher penalties.

 

Since China represented the United States' largest agricultural export market, China focused their retaliatory tariffs in that area. The U.S. Department of Agriculture found that the tariffs reduced U.S. exports of agricultural products by $27 billion from 2018 to 2019.

 

The damage ultimately was so bad that the federal government was forced to give farmers nearly $30 billion in taxpayer money just to compensate for lost sales to China. Overall, the tariff war caused U.S. exports to fall by 9.9 percent, while reducing GDP by 0.04 percent, according to the National Bureau of Economic Research.

 

The tit-for-tat escalation ultimately led to a "Phase One" trade deal between the two countries, signed with great fanfare by Trump in January 2020. The agreement required China to sharply increase its purchases of U.S. goods as a precondition for the president to remove the new tariffs. The agreement was a total flop. China, during the first two years of the deal (2020-2021), purchased only 57 percent of its commitments. China purchased $289 billion of U.S. goods, instead of the $502 billion promised.  

 

A partial explanation for such a big miss was the COVID-19 pandemic, which affected trade between almost all nations. In addition, supply chain disruptions had a meaningful impact on other U.S. products such as automobiles and aircraft exports. Weakening demand for imports overall, as China's economy declined, has also been a contributing factor.  

 

Bottom line: if one looks at trade between the two nations overall, China's purchases are below the level they were before the trade wars began.

 

The United Nations Conference on Trade and Development found that the trade war was simply a lose-lose for both countries. The tariffs were supposed to protect American industries, but they have hurt the U.S. economy instead. If there had been no trade war, U.S. exports between 2018 and April 2022 would have been $129 billion more, according to a Washington-based research group, Americans for Free Trade.

 

Unfortunately, the Phase One agreement did not end the tariffs, but only prevented them from going higher. The average tariffs on goods affected is still about 20 percent on each side.  Not only did the tariffs on Chinese parts, components, and materials not make our manufacturing sectors stronger and more competitive, it also did the opposite.

 

Our companies needed those Chinese intermediate products (now on the tariff lists) to manufacture finished goods here. Companies found that without them, competing with companies in Japan and Europe, which continued to have access to those cheaper Chinese inputs, made our products more expensive in the open market. Our companies continued to lose market share globally as a result. Those losses continue today.

 

Some may question why President Biden has continued Trump's misguided policies, despite the damage it has caused the U.S. economy, while doing little to hurt China's economy. The simple answer is politics.

 

Being "tough on China" is a popular stance among Americans, even if it means a weaker economy. If you throw in China's growing authoritarianism, suppression of human rights, oppression of minorities, and military ambitions in Asia, the Biden administration would need some strong counter arguments to justify an easing of tariffs.

 

Given the rising inflation rate and cooling economy in the U.S., President Biden may now have the political cover to roll back some of those tariffs. President Biden is hoping that reducing tariffs would lower the costs of everyday merchandise to consumers. Unfortunately, economists are expecting that tariff reductions will only have a modest impact on inflation, but in my opinion, every little bit helps when inflation is topping 8 percent.

 

This week, the U.S. Treasury Secretary Janet Yellen, and China's Vice Premier Liu He, held talks focusing on economic policy and relieving global supply chains. Words such as "pragmatic," "constructive," and "substantive" seemed to indicate that some movement on tariffs is in the offing. Let's see what develops throughout the week.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.