The Trump administration followed through today on a 25-percent tax on imports of $34 billion of goods from China, including machinery and components like semiconductors. A tax on another $16 billion of goods is in the works.
China immediately retaliated with a 25-percent tariff on imports of soy beans, other agricultural products and automobiles. These moves come on top of tariffs already imposed on steel, aluminum, washing machines and solar panels.
The aggregate amount of trade affected is moderate relative to the U.S. and Chinese economies, but for the U.S., this is the most extensive import protection since the disastrous Smoot-Hawley tariffs in the 1930s. President Trump has threatened a 10-percent tax on a further $200 billion of imports from China. What is the effect on the two economies and where does this all end?
China is in a fairly good position to weather this storm. Its economy is less dependent on exports in general, and exports to the U.S. in particular, than just a decade earlier. The value added in its exports to the U.S. is less than 3 percent of its economy.
This reflects the fact that China is at the end of many global value chains, which include inputs from the U.S., Japan, South Korea and Taiwan. Some of the pain from the U.S. tariffs will hit these other economies, not China. Still, the trade war comes at a bad moment in China's cycle.
Read Full Article »