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Economy

Time to Remove Tariffs

Jul 31, 2021
  • He Weiwen

    Senior Fellow, Chongyang Institute for Financial Studies

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U.S. Treasury Secretary Janet Yellen, said on July 11 that the U.S. tariffs on Chinese goods had hurt U.S. consumers.

She was merely endorsing the professional findings six months earlier of a report — A Crucial Partnership at a Crucial Juncture — from the U.S.-China Business Council, citing an Oxford University study. It found that the unilateral tariffs imposed on $370 billion in Chinese goods by Donald Trump, lifted the average U.S. tariffs on imports from China from 3.1 percent in early 2018 to 20.9 percent by the end of 2019  (actual rate 19.3 percent). As the tariffs are paid by U.S. importers, not Chinese exporters, they were reflected in a rise in import prices, which in turn were passed on to downstream manufacturers and consumers.

The increases brought a net loss of roughly $108 billion in U.S. GDP and 245,000 jobs during the 2018-19 period. Real household income was trimmed by $88 billion, or $675 per household. 

A new acute problem is inflation, with the Consumer Price Index hitting 4.2 percent in April 2021, 5.0 percent in May and 5.6 percent in June, a trend that not only erodes household income but also threatens short-term economic prospects generally. Because of the across-the-board tariff hikes on imports from China — costs that were passed on to consumer prices — inflation was aggravated. By contrast, before early 2018 the average tariff level on imports from China was 3.1 percent, and low-cost Chinese goods helped bring down the U.S. inflation rate by 1.0 to 1.5 percentage points per year.

On July 6, the U.S. Court of International Trade issued a preliminary injunction on liquidation of additional tariffs on List 3 and List 4A of Chinese goods, which supported more than 3,600 U.S. businesses in their lawsuit against the federal government for eroding their revenue. The IMF has also urged the U.S. government to revoke the tariffs on Chinese goods.

The USCBC-Oxford study also shows that if the tariffs are not lifted, U.S. GDP might be cut by $1.6 trillion over the next five years, with job losses at 732,000 in 2022, and 320,000 in 2025. Household income would be cut by $ 6,400 by 2025. Hence, the tariffs on imports from China have proved to be a poor weapon. They hurt the U.S. economy and households instead of China.

Catherine Tai, the U.S. trade representative, has said the tariffs will be kept for the moment, because they are tools, or bargaining chips, for exerting pressure on China. Facts, however, have already shown the tariff bargain to be useless. Additional tariffs by the U.S. have failed to cut imports from China. The latest Chinese customs figures show that the additional tariffs only caused a temporary drop in Chinese exports to the U.S. from late 2018 to early 2020. Ever since Q2 2020, there has been a strong rebound, surpassing the historic high in 2018. In the first half of 2021, Chinese exports to the U.S. hit $ 252.6 billion, 16.1 percent higher than the same period in 2018 which was a historic high. It is highly likely that, for all of 2021, Chinese exports to the U.S. will break the $500 billion barrier for the first time and thus set a new record, rendering tariffs useless. 

  U.S. tariffs on Chinese goods and Chinese exports to the U.S.

               ($ billion, change in percent)

Period      volume          y-o-y       over 2018

2018/Q1           99.92

     Q2          117.86

     H1          217.78                     +12.9%

   07/06         25% tariff on $ 34 billion Chinese goods

   08/23         25% tariff on $ 16 billion Chinese goods

   09/24         10% tariff on $ 200 billion Chinese Goods

     Q3          131.04                +12.8%

     Q4          129.60                 +7.4%

   2018          478.42                +11.3%

2019/Q1           91.11   

05/10        Tariffs on $ 200 billion in Chinese goods raised to 25%         

     Q2          108.30            

     H1          199.40                 -8.4%

     Q3          112.59                -14.1%

    09/01         15% tariff on $120 billion in Chinese goods

     Q4           106.51               -17.8%

   2019           418.51               -12.5%

2020/01/01       Tariff on $120 billion in Chinese goods down to 7.5%

2020/Q1           68.26               -25.1%           -31.7%

     Q2          109.30                -2.9%            -7.3%

     H1          177.56               -11.0%           -18.5%

     Q3          132.47               +17.6%           +1.1%

     Q4          141.79               +33.1%           +9.4%

   2020          451.81                +8.0%           -5.6% 

 2021/Q1        119.18               +74.6%          +19.3%

H1         252.86             +43.6%           +16.1%   

Source: www.chinacustoms.gov.cn, and calculations. 

Another purpose of the tariffs on Chinese goods was blocking the growth of the Chinese high-tech industry. Here they have also failed.

According to official Chinese statistics, the output of equipment and high-tech industry grew, respectively, by 22.8 percent and 22.6 percent year-on-year during H1 2021. Output of semiconductor chips, the focus of the U.S. embargo, shot up by 48.1 percent, and that of photovoltaic spare parts went up 41.7 percent. The electronic apparatus sector jumped up 39.9 percent. Exports of special equipment increased by 33.7 percent; electrical equipment jumped by 29.9 percent; and electronics overall was up by 17.6 percent.  

According to the U.S. Bureau of Economic Analysis, imports from China have not recovered to pre-tariff levels but have seen the fastest growth among all major U.S. trading partners. During the first five months of 2021, U.S. goods imports from the world increased by 21.7 percent year-on-year to $1,093.65 billion, a net increase of $194.95 billion. Imports from China increased by 32.5 percent, or $46.53 billion, 23.9 percent (almost one-fourth) of the total increase worldwide. Imports from the Asia-Pacific Region, the largest U.S. source of supply, reached $368.32 billion, or one-third of total U.S. imports, $64.07 billion more than a year ago. China alone accounted for 72.6 percent of that increase.

Data from the U.S. International Trade Administration also shows that during Q1 of this year, U.S. imports of electrical equipment and appliances, machinery, miscellaneous manufacturing commodities, textiles and metal products exceeded that of Q1, 2018, the pre-tariff level.  

 All such facts and figures prove that both the U.S. market demand for Chinese goods and Chinese supply availability remain extremely solid because of their close interconnection in the global supply chain. Politics have failed to change that.

Based on all this, it is logical to remove the tariffs on Chinese goods, as doing so would benefiting both U.S. and Chinese businesses and families.

Another imperative is that the WTO ruled in September that the unilateral U.S. tariffs on Chinese goods violate the GATT clauses. Since the Biden administration has claimed to be back to multilateralism, removal of the Trump administration’s tariffs would be a significant step in the right direction.

The removal of tariffs should not be linked to phase one of the China-U.S. Trade Agreement. The agreement covers technology transfers, intellectual property rights, farm products, exchange rates and expansion of trade. There is no clause referencing tariffs.

The Biden administration should remove the tariffs on Chinese goods at an early date. And once they are removed by the U.S. side, China should immediately remove its countertariffs on U.S. goods. If this is realized, China-U.S. trade will see new, robust expansion that supports economic recovery in both countries. 

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