Trade War with China

Good op/ed by prof Stieglitz. for full article click the link


The US is at Risk of Losing a Trade War with China
Jul 30, 2018
The “best” outcome of President Donald Trump’s narrow focus on the US trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). In fact, significantly reducing the bilateral trade deficit will prove difficult.

NEW YORK – What was at first a trade skirmish – with US President Donald Trump imposing tariffs on steel and aluminum – appears to be quickly morphing into a full-scale trade war with China. If the truce agreed by Europe and the US holds, the US will be doing battle mainly with China, rather than the world (of course, the trade conflict with Canada and Mexico will continue to simmer, given US demands that neither country can or should accept).

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Jul 30, 2018 says it's the wrong battle, fought by incompetent generals, and lacks the public support required to win.


Beyond the true, but by now platitudinous, assertion that everyone will lose, what can we say about the possible outcomes of Trump’s trade war? First, macroeconomics always prevails: if the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit. Worse, because of the tax cuts enacted at the end of last year, the US fiscal deficit is reaching new records – recently

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to exceed $1 trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war. The only way that won’t happen is if Trump leads the US into a recession, with incomes declining so much that investment and imports plummet.

The “best” outcome of Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). The US might sell more natural gas to China and buy fewer washing machines; but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Trump’s wrath. But, because the US interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome means that the US will be worse off than it is today.

now noticed
Trump could raise tariffs on $200 billion in Chinese goods

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The Trump administration plans to raise pending tariffs on $200 billion in Chinese goods to 25% from 10%, a source familiar with discussions confirmed to CNN.
The news was

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by Bloomberg.
The move, which is not finalized and could change, according to the source, comes as the United States and China remain locked in a trade war. Talks between US and Chinese officials have done little to ease tensions.
The United States has already imposed 25% tariffs on Chinese goods worth $34 billion. China immediately responded with its own tariffs on US goods worth $34 billion.
A second round of tariffs on products worth $16 billion could take effect as soon as this week.
US Trade Representative Robert Lighthizer earlier this month

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when he released a list of thousands of additional Chinese exports worth $200 billion that could face 10% tariffs after a public comment period. It included fruit and vegetables, handbags, refrigerators, rain jackets and baseball gloves.
Those tariffs, which might now be steeper, could go into effect as soon as September.

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Despite not having much of a US market, which ironically its sanctioned rival ZTE does, Huawei managed to become the number 2 smartphone vendor in the world, forcing Apple into third position.

It seems the trade war betwen the US and china is acelerating the exodus of eletronic manufacturing from china to SE asia.

Orthan said:

It seems the trade war betwen the US and china is acelerating the exodus of eletronic manufacturing from china to SE asia.

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Companies have tried doing electronic manufacturing in SE Asia in the past, and many still do so in the present.

But there is one problem.

Many parts still have to be sourced from China. Sourcing all these components and shipping them to the SE Asian country makes things more expensive than to assemble the product within China itself, where you can get all these parts quicker. Another problem is the parts from Korea and Japan, which is literally cheaper to ship to China than to a SE Asian country.

Also depends on the SE Asian country, because frankly, you have to deal with an absurd amount of corruption with some of them in all levels. Ports are not as efficient, road and electrical infrastructure are not as efficient. In some cases internet is not as efficient like in the Philippines, which is horrendous. All these affects your cost of operation.

The availability of advanced automation in China makes electronics manufacturing more efficient.

Another factor is the volume of shipping. Shipping is more expensive in and out from places where there is less volume. Where the volume is greatest, like the US and China, shipping is cheapest. But its from a country where the volume of trade is small, the shipping prices would jump. This adds to the final, and landed cost of the product in the US.

Electronics to the United States only make up a fraction of the global market. There is a risk in trying to beat the tariffs to that country through a bypass by less efficient manufacturing in another country. This affects your competitiveness with the rest of the world.

What's going to happen is that you are going to have subassemblies made in China, with the final assembly made in some other Asian country, stamp it like "Made in XXX" there. But then this practice isn't also new either, and its been around for years. Is Bloomberg discovering that this is something new?

There should be another problem to this. That is, all this does not add jobs to the American people. It just shifts the manufacturing out of China but not back to America. Sooner or later, even unpredictable Trump may just lash out at that, and impose tariffs on SE Asian countries also. So that's a risk there.

A silly question, perhaps. If product A is finished in China, and is bought by a third country, and then a factory in that third country merges product A with product B, where A makes 60-90 percent of the final cost of the final AB product, and then sells that AB product to US, how would the tariffs be applied? And who would decide and how would it be decided just how much worth does product/component A have in final AB product?

Totoro said:

A silly question, perhaps. If product A is finished in China, and is bought by a third country, and then a factory in that third country merges product A with product B, where A makes 60-90 percent of the final cost of the final AB product, and then sells that AB product to US, how would the tariffs be applied? And who would decide and how would it be decided just how much worth does product/component A have in final AB product?

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There are extremely complex rules on country of origin definitions that deals with precisely this question.

Those need to be filled out and certified prior to shipment, with such certificates needed to clear customes.

Where the cut-offs are can vary massively from product to product and country to country.

But isn't cost of production and worth of semi finished product a matter of company secret? Therefore, company itself declares it's worth and price? Therefore, one may have the opportunity to fool the customs and tariff rules that way?

Long term export driven growth is not sustainable, which I think would have been apparent a few years down the road anyways. In order for an economy to avoid the middle income trap, it needs to continue to move up the value chain and boost domestic consumption. Better to be weaned off the export driven model sooner rather than later, as short term pain now is prefferpre to long term pain in the future.

Chinese typically save more compare to American .Also what's social safety net in China in term of health care, retirement funds, housing etc. These will affect how much consumer willing to spend.