After months of easing in trade tensions, the tariff war has suddenly restarted. According to the US administration, China has reneged on a number of promises. In retaliation, Donald Trump has announced that tariffs on $ 200bn of products imported from China will increase from +10% to +25% (it was done this morning) and has threatened to tax all remaining imports from China. He sees these measures as a “tax” that the Chinese government would pay to its US counterpart. There is no such thing in reality. To date, few end-consumer goods have been affected by these measures. President Trump may think that the US is immune, but he is mistaken.
When country X hikes the trade tariffs on the products
imported from country Y, two questions arise:
1) what is the impact on trade volumes? and
2) who bears the cost?
The trade data sheds ample light on the first question. In
the case of US-China trade, we note a sharp reduction in imports of goods,
sometimes preceded by an increase in inventories.
The second question is more complex. Exporter Y can reduce its margins or importer X can pass on the increase, partially or totally, to the price paid by the consumer. The answer depends on the price elasticity and, therefore, competition and substitutability on the relevant product markets.
Donald Trump claims that the cost is paid by China.
There would therefore be no risk in conducting a tariff war – provided, however, that you ignore the retaliatory measures already adopted by China (US farmers can testify to their severity), which will undoubtedly be extended. In fact, theory and past experience suggest that the final cost falls largely on the consumer because there are never instant and perfect substitutes for taxed products. Studies have identified a significant impact of tariffs on consumer prices, but taking into account the gains made by local producers and the increase in tax revenues, the total effect on the economy would be small (0.04% of GDP so far). Other authors argue that if the tariff war is limited to a country or sector, and not general, it should be possible to relocate production and, in doing so, cancel out the impact on prices. However, moving production lines is not without cost and this implies having visibility on trade policy (we are far from that).
Finally, we note that if the impact of trade tariffs on US prices is currently low, it is because the trump administration has targeted as a priority goods where the Chinese market share in total imports is low, making it possible to find other suppliers. This would no longer be the case if the tariff war were to intensify and extend to all trade with China
Bruno Cavalier – Chief Economist – Oddo BHF
Fabien Bossy – Economist – Oddo BHF