The Trade War: So Much That Trump Didn’t Take Into Account

According to U.S. statistics, in 2018, the United States exported $120 billion worth of goods to China and imported nearly $540 billion, bringing the U.S. trade deficit close to $420 billion. In the U.S.-China trade war, President Donald Trump often says the U.S. is getting an unfair deal, but is this really true? Just because the U.S. imposes high tariffs on China, will exports from China be blocked? Will Chinese economic development be harmed?

First, the economic theory of “revealed preference” tells us that consumer preference can be understood by looking at purchase behavior. So-called revealed preference is exhibited when consumers buy goods they can afford. No revealed preference is indicated when they don’t buy goods, even though they can afford them. Thus, consumers have revealed a preference for the goods imported in the past from China – not from Mexico or other Central or South American countries, or from Europe – and consumers reveal no preference for goods from other countries. Once tariffs are imposed, consumers no longer buy Chinese goods, instead buying goods from other countries, goods they revealed no preference for before the tariffs. For consumers, this situation is hard to bear, and they are getting a bad deal.

In the past, why did the U.S. import so many goods from China every year? The answer is that the U.S. manufacturing industry was diminished early on, due to international division of labor. Except for some high-tech products, high-value products and munitions, only a few scattered industries remain. However, these industries also need semifinished goods from China, such as components, parts and accessories. Many essential goods have long been imported from China through the effort of Taiwanese businesspeople behind the scenes. And because these ordinary commodities and toys such as high-quality art paper used to print Bibles, colorful inks used to print children’s books and nontoxic ink are inexpensive and of good quality, consumers have long loved them. The U.S. cannot produce such products itself or import them from other countries on a long-term basis to resolve the issue.

Thus, the chances of getting hurt by raising tariffs on China are greater for America than for China, especially regarding goods for which the U.S. heavily relies on China; tariffs are raised, but the U.S. still has to buy the goods. Goods that are imported from other countries to replace those from China will certainly be more expensive. This will cause the cost of living for Americans and the cost of manufacturing for industries to increase as tariffs increase.

Importantly, the uncertainty and market fluctuation the trade war has caused will eventually trigger a recession. On Sept. 4, Trump regretfully acknowledged that without the tariffs, “our stock market would be 10,000 points higher than it is right now.” Even if the U.S. government removes the increased tariffs, the economy will recede and government tax revenue will decrease. Raising tariffs makes up for revenue losses, but it is only a Band-Aid for a fiscal black hole. The American people will not feel the benefits of increased tariffs.

Moreover, if Chinese exports to the U.S. are blocked, will Chinese economic growth really be harmed? Compared with China’s gross export value of $2.5 trillion, that of goods to the U.S. is only $540 billion. Even if China completely loses the U.S. market, it will only lose approximately 20%, which will not hurt its economy. Instead, this will force China to develop its domestic market or relationships with other international markets more vigorously. The Chinese economy will have to change and adjust, and will become a more difficult opponent for the U.S. to deal with in the future.

Basic economic theory also tells us that trade should benefit both sides. Basically, the U.S. trade deficit was caused by the continually falling domestic rate of savings. Even without China, the U.S. would have a deficit with other countries. Therefore, the U.S. is attacking China as a scapegoat for its own overall economic imbalance.

In today’s world of integrated economies, the trade war has destroyed trust between two of the world’s superpowers. The overall impact has not only been felt in indicators, such as trades and tariffs, but also in huge mutual benefits. Now, the trade war is only part of the full-on struggle between the U.S. and China. We should not expect the trade war to end soon and must mentally prepare for long-term turmoil.