BOFIT Viikkokatsaus / BOFIT Weekly 2018/38

On Monday (Sept. 17), United States president Donald Trump unveiled a new round of tariffs on imported Chinese products with a combined value of $200 billion a year. The additional 10 % tariffs enter into force on September 24 and rise to 25 % at the start of next year unless US-China talks manage to resolve the intensifying dispute. The US had already imposed import tariffs on China worth $34 billion a year at the beginning of July, as well as additional tariffs on another $16 billion worth of Chinese imports in August. US tariffs announced so far apply to about half of US goods imported from China.

As in the previous instances, China retaliated immediately to the US measures by imposing additional tariffs on American goods. China’s additional tariffs, 5 % and 10 % depending on the product, apply to US goods imports worth $60 billion a year. They enter into force on the same day as the newest round of US tariffs. Trump has indicated that the US is prepared apply additional tariffs to practically all goods imports from China if China continues to rebuke US measures. No high-level trade talks have been announced.

While the American Chamber of Commerce in China notes that trade wars only produce losers, they do not believe the dispute will be resolved quickly. According to its survey made during the August-September cusp, the before and newly imposed tariffs harm 75 % of American firms operating in China. Nearly half of the 430 firms responding said the tariffs imposed by the US have a “strongly negative effect” on their operations, and just a handful of firms saw themselves as benefitting from Trump’s tariff policies. Tariffs have driven up production costs for American firms, reduced demand for their products and increased prices to end consumers. About half of the responding firms expected their profits to shrink. The trade war is also apparent in the fact that firms have postponed or cancelled their investment plans and are seeking to restructure their supply chains. For example, 31 % of American firms operating in China reported that they are trying to reduce their purchases of US-made parts or component assembly operations in the US. Very few firms said they were considering moving their production back to the US. Respondents also noted that, in addition to the burdens from new tariffs, Chinese bureaucrats have complicated their lives through increased inspections and oversight, as well as slowing goods handling at customs.

The latest annual survey of the European Union Chamber of Commerce in China (EUCCC) asks about the impacts of higher tariffs on European firms operating in China. It finds that roughly half of firms see tariff increases as harmful to their businesses, while the rest see a neutral impact. Most European firms were taking a wait-and-see position and they have yet to take any measures to respond to the tariff hikes.

Even with China’s leaders trying to portray the country as a beacon of free trade, the EUCCC asserts that the roots of the trade war originate with China’s foot-dragging on market-economy reforms and slowness in opening its economy to the world. The EUCCC reports that domestic Chinese firms still face far fewer barriers and operate far more freely than foreign firms in China. Already for years, American and European firms have called for China to open its markets and assure foreign firms of a level competitive playing field.