Trade War with China?

By: Grace Shi, ’19

President Trump’s election has brought a possible trade war with China to the forefront of politics. During the election campaign, Trump stated on several occasions that, if elected, he would impose a 45% tariff on Chinese imports.

One 2016 study by MIT economists David Autor, David Dorn, and Gordon Hanson about labor market adjustments as a result of “the China shock” has found that 2.4 million US jobs have been lost between 1999-2011 due to import competition with China. Job loss has been the main reason for fear of free trade amongst the working class and for Trump’s subsequent ability to gain support from this group of Americans.

If Trump were to keep his promise to “remember the [so-called] forgotten” and impose some sort of tariff on trade with China, this will almost definitely start a trade war in which deadweight social loss will cause both sides to lose.

One trade war that has demonstrated such unintended consequences is the U.S.-China trade war with tires and chickens. At the start of the 21st century, China’s share of the U.S. tire market increased from 5% to 17%, with import volume increased from 15 to 46 million tires annually. United Steelworkers Union claimed that 5,000 domestic jobs were lost as a result of these Chinese imports.

Traditionally, the losers of free trade—namely less efficient, high-cost domestic producers and their employees—receive much more publicity than the winners—consumers who enjoy low costs and exporters who enjoy cheap raw materials imports. In 2009, the U.S. increased tariffs on Chinese tire imports from 4% to 35% in order to protect and bring back U.S. tire manufacturing.

The first consequence of the tariff was a drastic increase in the price of low-end tire imports from about $55 to as high as $90 per tire: a 60% increase. Ironically, although tire imports from China increase, tire imports from other countries rose. Imports from Canada rose 30%, imports from Mexico rose 117%, and imports from Indonesia rose 152%.

While 1,200 of the 5,000 U.S. tire manufacturing jobs were saved, 2,500 tire retailing jobs were lost due to the higher tire prices. When consumer and employment costs were compared to the supposed gains from the tariff, it was found that each job saved cost $900,000. As a final blow to the U.S. economy, China imposed a 105% tariff on the U.S. chicken industry, causing 350,000 jobs to be lost at 50,000 chicken farms to shut down. In the end, due to the protective tariffs of each side, the U.S. lost $1 billion in exports.

In the end, this example raises the question of how we determine the “worth” of saved jobs and how we balance inefficient production with the minimal tariff revenues gained. Have we already “lost the war” in terms of manufacturing jobs?

Nowadays, China has begun moving away from exporting cheap mass merchandised items such as T-shirts and tires, partly due to the emergence of even cheaper east Asian producers, including Vietnam and Bangladesh. Many economists believe the trade-related conflict between the U.S. and China will transition to being a high-tech battle, in which China will focus more on creating their own domestic high-tech gadgets—such as smartphones, medical devices, electric cars, and robots—instead of importing them from America. Unlike job losses in the manufacturing sector, this trade war threatens the U.S.’s main economic strengths and leadership in innovation. This, compared to our manufacturing struggles, has a much greater potential to rock the U.S. economy and undermine one of our greatest global competitive advantages.

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