(What’s Left of) Our Economy: Unexpected Support for the Trump China Tariffs

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Benedikt Zoller-Ryzdek, Bloomberg.com, capital equipment, capital goods, China, consumer goods, consumers, European Network for Economic and Fiscal Policy Research, Gabriel Felbermayr, inflation, producer goods, tariffs, Trade, trade wars, Trump, Xiaoqing Pi, {What's Left of) Our Economy

As I live and breathe! A pair of economists has just issued a report contending that China, not the United States, so far will be the big loser in the current trade confrontation between the two countries! In the process, they offer a badly needed explanation of why, in a real sense, exporters in China – not importers and therefore, presumably, consumers in the United States – will pay by far the highest price imposed by President Trump’s tariffs.

According to Benedikt Zoller-Ryzdek and Gabriel Felbermayr of the European Network for Economic and Fiscal Policy Research, Americans (whether households or business customers) certainly won’t get away scot free in the trade war as it’s been conducted so far. The authors calculate that the U.S. levies imposed so far by President Trump on imports of Chinese goods will boost the price of these products by an average of 4.5 percent.

The amount is pretty small, they contend, because American demand for these products is pretty elastic, as economists say. That is, it varies considerably depending on the price, and principally, if U.S. consumers find the post-tariff prices too expensive, they can switch fairly easily to alternatives – and even do without these products at all. Since these options are well known to Chinese producers and all the U.S. middlemen involved in making sure that Chinese-made goods reach their intended customers, they’ll know better than to practice much price-gouging.

Interestingly, the biggest hit to the nation is projected to come from consumer goods tariffs – the authors calculate that they’ll raise the prices of these products by 6.5 percent on average. In addition, they note that low-income Americans will bear the brunt of these higher prices, since they do buy more than their share of low-cost Chinese goods.

But the price increases for the Chinese capital equipment and various inputs used by American domestic companies (materials, parts, components, etc.) will be lower – only two percent for the former and 5.2 percent for the latter. So if the Zoller-Ryzdek and Felbermayr are right, the widely feared hit to U.S. industrial competitiveness resulting from the Trump tariffs should be eminently manageable for American domestic manufacturers – especially if they improve their chronically lagging productivity performances.

Chinese exporters, however, will far far worse, according to the study. The reason isn’t the one that President Trump has advanced – that they’ll need to pay ten and 25 percent tariffs they’re currently and might be charged all into the U.S. Treasury. Instead, these exporters will have to accept much lower prices for these exports if they want to keep selling to Americans – which will slash their profits, force them to withdraw from the U.S. market, and threaten their very viability if they do pull out, since alternatives in a slow-growing global economy won’t be abundant. The authors estimate the average price decline for Chinese exports at more than twenty percent, with makers of the most sophisticated such products (investment goods like capital equipment) suffering the steepest declines. Incidentally, those are the Chinese products and exports that the Trump trade team is most worried about.

And indeed, Zoller-Ryzdek and Felbermayr specify that this result was no accident: It stemmed from the administration’s “strategic choice of Chinese products.”

The European Network study doesn’t mean that the U.S. economy faces nothing but smooth sailing in the trade conflict. The authors note that the benefits of strategically picking and choosing Chinese products to tariff will fall significantly if the levies eventually extend to all U.S. imports from China. I also wonder if they’ve underestimated the resilience of Chinese exporters – because even a heavily indebted Chinese economy can employ so many means of subsidizing their losses. That’s also one big reason I’m skeptical that the current tariffs will decrease the mammoth bilateral merchandise trade deficit run by the United Stated with China by as much as the authors believe (nearly 17 percent).

Nonetheless, Zoller-Ryzdek and Felbermayr also anticipate a benefit from the Trump strategy that substantially undercuts the conventional wisdom among trade mavens in the United States. They observe that the increased tariff payments forced on Chinese exporters could, at least for a while, be used to compensate the low-income American consumers facing higher prices for Chinese-made garments and other everyday goods.

So although this study isn’t the last word on the U.S.-China trade wars, it provides important support for the Trump approach purely in economic terms. Coupled with America’s vital strategic stake in preventing China from stealing and subsidizing its way to greater global competitiveness in the high tech and advanced manufacturing industries crucial both to U.S. national security and prosperity, it’s a strong signal for the President to stay his current China course – and even to move more explicitly to disengage America from what clearly has been a losing and increasingly dangerous relationship.

Incidentally, I first got word of this report from Bloomberg.com reporter Xiaoqing Pi – who deserves credit for summarizing it in a brief item yesterday.   

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Im-Politic: Is Trump’s Wall Plan Unrealistic, or All Too Realistic?

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2016 election, capital equipment, Donald Trump, export-led growth, Im-Politic, Immigration, Mexico, remittances, The New York Times, Trade, trade wars, Vicente Fox, wall, Will Olney, Williams College

Since Donald Trump revealed key details behind his proposal to deal with illegal immigration from Mexico by building a wall along America’s southern border, I’ve been waiting for the critics to make abundantly clear why the plan is nuts. Judging from recent attacks from Mexico and in The New York Times, it looks like the wait will be lengthy.

The looniest claim by far is that Mexico would launch a “trade war” with the United States if the Republican front-runner won the White House and used tariffs on Mexico’s exports to the United States to fund the project. This prospect has been raised by no less than former Mexican President Vicente Fox, who told the Associated Press, “Let’s suppose he establishes tariffs, just imagine. We put tariffs on the (hundreds of billions of) dollars that the United States sells to Mexico.’’

It seems that in his golden years, Fox has forgotten that the United States buys nearly 80 percent of Mexico’s exports annually. So that export-dependent economy is going to antagonize its best customer by far? And at a time when sluggish world growth means that no other markets could possibly substitute for America’s? Rotsaruck with that.

Fox also ignores the huge share of U.S. goods exports to Mexico (at least half in 2015) that consists of capital equipment and various other industrial inputs – i.e., the building blocks of Mexico’s export-focused manufacturing base. Talk about cutting off one’s nose, etc. And although it’s true that Mexico could find other suppliers, its own demand for such machinery, equipment, and materials would practically vanish if its access to the U.S. market was lost or greatly reduced.

Equally silly was the op-ed in yesterday’s Times by Williams College economist Will Olney, who argued that if America could overcome the (formidable) legal, financial, and logistical obstacles to financing the wall a la Trump, the plan could harm the United States as much as Mexico. Unfortunately, the two main reasons he provided hold no water.

First, according to Olney, paying for the wall by effectively halting Mexican immigrants’ remittances back home could prevent these immigrants from helping their relatives “invest in education, start businesses and get out of poverty.” As a result, “withholding this money may actually encourage immigration to the United States.” But what seems to have slipped Olney’s mind is that regardless of more adverse economic conditions in Mexico, migrant flows from south of the border logically wouldn’t change once the wall was built because migrants would…face a wall.

Olney would have been better advised to note that bigger migration flows could be expected while the wall was still incomplete. But there’s a fly in this ointment, too: Even though Mexicans have been streaming to the United States legally and illegally for many years, and sending money back home, the impact on Mexican poverty seems unimpressive. For half the country’s population is still classified as poor.

More nonsensical is Olney’s claim that “Banning remittances could also reduce incentives for the best and brightest immigrants to come to the United States. Without the opportunity to provide for their family and friends back home, many talented immigrants might choose to move elsewhere. “ But no one is talking about banning or curbing remittances to any country other than Mexico. And there’s no shortage of the best and the brightest from elsewhere knocking – legally – on America’s door.

Moreover, even remittances to Mexico wouldn’t be banned forever, or even for very long. Under Trump’s plan – which calls for banning remittances only from illegal U.S. residents from Mexico – all restrictions would be lifted once a “one-time payment of $5-$10 billion” to finance wall construction is made by Mexico’s government.

Trump’s wall-financing proposal may indeed founder on many of the aforementioned legal, financial, and logistical obstacles – like keeping track of wired money transfers, and distinguishing between those that will be permitted those singled out for blocking. And the wall itself may prove unfeasible for similar reasons. But it’s also quite possible that these barriers can be overcome – and that Trump’s critics don’t mainly object to the wall because it can’t work, but because it can.