By Rick Katz

trump

Donald Trump claims that if elected president he will impose a 45 percent tariff on all imports from China and slap a tariff of 35 percent on imports from the Mexican operations of Ford, Carrier, and other Mexican affiliates of American companies. If Trump wins the presidential election, what would be the economic fallout of his plans?  Would the negative impact be enough to pressure Trump to change course?

Trump’s promise that jobs will return to the United States isn’t going to happen — at least not in the case of China. That’s because it wasn’t American jobs that moved to China when its exports increased. In the last 15 years, most of China’s exports to the United States replaced exports from other countries in Asia, such as Japan, Korea, and Thailand. So instead of increasing jobs in Flint or Dubuquer, a decline in US imports from China is more likely to increase jobs in Vietnam or Malaysia.

As for the negative effects, they fall into the following categories:

  • Price shock/tax hike. The “first order effect” of a 45 percent tariff on all imports from China would be equivalent to a tax hike of 1.2 percent of GDP. This would likely cause job loss, not job gains.
  • Trade War. China and Mexico would likely retaliate against United States, causing a drop in US exports to China and Mexico. China might even hinder the export of certain critical items to the United States, just as it hindered shipments of rare earths to Japan when tensions flared in 2012  over the Senkaku/Diaoyu Islands. This, too, could lead to job losses
  • Financial Market turmoil. The stock market and currency markets would react — possibly in a more drastic way than in the second half of 2015 because of fears of a China slowdown.
  • Effect on East Asia. The countries of East Asia would likely be hurt even more than the United States. Exports from Japan and the rest of East Asia depend more on China’s own exports to the United States than on China’s internal growth.

China didn’t take US jobs

“I’m going to bring jobs back from China,” Trump recently told CNBC. “I’m going to bring jobs back from Mexico and from Japan, where they’re all — every country throughout the world — now Vietnam, that’s the new one. They are taking our jobs. They are taking our wealth.”

His logic might sound like common sense to many voters. In 2015, the United States imported $482 billion worth of goods from China, but exported just $116 billion, leading to a bilateral trade deficit equal to 2 percent of US GDP. Trump can also point to American economists who claim this deficit has cost America millions of factory jobs.

The problem is that Trump’s argument flies in the face of reality. The rise in imports from China over the past 15 years did not replace products previously made in the United States; rather, it replaced products previously imported from elsewhere in Asia.

The December 2015 Congressional Research Service entitled, China-US Trade Issues states: “In 1990, 47 percent of the value of US manufactured imports came from Pacific Rim countries (including China); this figure declined to 46 percent in 2013. Over this period, the share of total US manufactured imports that came from China increased from 3.6 percent to 26 percent.”

In short, the growth in manufactured imports from China didn’t add substantially to America’s overall imports of factory goods, it replaced imports that previously came from other Asian countries. Moreover, products like semiconductors, which previously came directly from Japan, now come to the United States inside computers that were assembled in China. US trade law requires that it be labeled “Made in China,” even though the value of the Made-in-Japan components are greater than the value of the work done in China. For example, the iPod, which is labeled “Assembled in China,” derives only 4 percent of its value from Chinese inputs, and this is mostly from assembly labor.

“In 2000, Japan was the largest foreign supplier of US computer equipment (with a 20 percent share of total US imports), while China ranked fourth (with a 12  percent share),” according to the CRS. “By 2014, the value of (Japan’s) shipments dropped by 73 percent from 2000 levels, and its share of US computer imports declined to 3.4 percent. China was by far the largest foreign supplier. … While US imports of computer equipment from China from 2000 to 2014 rose by 725.1 percent, the total value of US computer imports worldwide rose by only 52.4 percent.”

While computers are the largest single item in China’s exports to the United States, 99 percent of those exports are made by foreign-owned firms that choose to locate their assembly in China. If tariffs imposed by Trump made Chinese costs prohibitive, then, over time, they’d move their assembly to other countries, perhaps Thailand, Vietnam, or Mexico. How can Trump “bring back” those low-skill assembly or textile jobs to the United States when they haven’t been in the United States for decades? Is Trump going to respond by imposing tariffs on Thailand and Vietnam too?

‘How come everything I buy is made in China?’

Recently, a friend asked me: “How come everything I buy is made in China?” It’s easy to understand this perception. An American who walks into the local store will find about 70 percent of the goods on the shelves carry the “Made in China” label. In 2010, 36 percent of the clothing and shoes bought by American were labeled “Made in China.”

But the shoes, shirts, toys, hammers, cellphones, and patio chairs at a big-box store comprise only a small share of the overall consumer dollar. A few years back, the Federal Reserve Bank of San Francisco found that goods carrying the “Made in China” label account for just 2.7 percent of all consumer spending on goods and services.

The Chinese supply is limited to a few items that only account for about 8 percent of total US consumer spending. For example, goods labeled “Made in China” account for 20 percent of all consumer spending in the “furniture and household equipment” category and 36 percent of all spending in the “clothing and shoes” category. On the other hand, Chinese-made goods have little presence in services, which takes up two-thirds of the US consumer dollar, or in food, energy, and automobiles.

Even though “Made in China” goods account for 2.7 percent of US consumer spending, the actual Chinese content is just 1 percent. The other 1.7 percent consists of inputs from other countries that are assembled in China. Again the iPhone provides a good example: an iPhone exported from China contains Japanese chips and American glass which is then assembled by a Taiwanese-owned firm operating in China. The Chinese share is higher in low-tech goods such as textiles, apparel, and footwear. In electrical and optical machinery China’s share is 46 percent.

The San Francisco Fed found the same trend as the Congressional Research Service: most of the rise in US imports of consumer goods from China came, not at the expense of American producers, but of producers in other countries.

The total import content of US consumer spending on imports from all countries was relatively stable in the 12-14 percent range from 2000-2010 (of which about half consisted of the crude petroleum imports embedded in gasoline and other consumer products). On the other hand, the Chinese content of US consumer spending doubled from 0.9 percent in 2000 to 1.9 percent in 2010.

“The fact that the overall import content of US consumer goods has remained relatively constant while the Chinese share has doubled indicates that Chinese gains have come, in large part, at the expense of other exporting nations,” the Fed concluded.

Why some tasks are done in China

Some tasks are done in China because that happens to be the best — not just the cheapest — place to do them. Steve Jobs insisted on glass screens for the iPhone because he found that plastic screens were too easily scratched. Apple hired America’s Corning Inc. to make the big panes of specialty glass, but those panes had to be cut — with immense precision in cutting and grinding — to fit them into the iPhones at a cost that would keep the phones affordable. According to the New York Times, Corning could not do that part of the job, but a company in China could. It’s not clear whether a company elsewhere in Asia could match the Chinese company’s price and produce the same quality phone screens.

Those glass-cutting jobs will not come back  to the United States; they were never in the United States in the first place. All a 45 percent tariff on an Apple iPhone would achieve is to increase the price and make it more difficult for Trump’s working class supporters to afford.

Tax hike during lackluster recovery

The most immediate effect of Trump’s tariffs against China and Mexico would be a tax hike of about 1.5 percent of US GDP. A tariff is a tax paid by those importing goods from China and Mexico. It goes from the pockets of US firms and consumers straight into the vaults of the federal government. Doing this in the midst of a lackluster recovery would be a “job-killer.”

Trump’s plan levies a 35 percent tariff on products produced by Ford and Carrier (air conditioners) in Mexico on the grounds that they have shifted production from the United States to Mexico. The majority of the manufactured goods — 56 percent — imported from Mexico are made by US firms importing them from their affiliates. If Trump applied the same principal to all of these firms, that would mean a tax hike on Mexican imports equal to another 0.3 percent of US GDP.

Unless Trump returns that money to US firms and consumers through other tax cuts, his plans would remove 1.5 percent of purchasing power from the US economy. That’s the kind of hit that could cause a mini-recession, such as the 1.4 percent peak-to-trough decline in US GDP seen in the 1990 recession. The size of the hit to GDP depends not only on the direct “multiplier effects” of such a tax hike, but also on what economic uncertainty does to business investment.

Hitting US firms who trade with China, Mexico

The tariff hikes would cause a big disruption beyond the macroeconomic ripple effects of the tax hike. It would disrupt the operations of all the firms involved in US trade with China and Mexico.

In the case of China, 80 percent of all manufactured goods that the United States exports to China are made by US firms to their subsidiaries, affiliates, joint venture partners, or related firms in China. Most manufactured goods — 77 percent — the United States imports from China come from related firms. For Mexico, the comparable numbers are 70 percent for US exports and 56 percent for US imports.

When most people think of imports from China, they think of shoes, clothes, and consumer electronics products, but the majority of products the United States imports from China, Mexico, and other countries, are capital and intermediate goods that US firms need to run their production processes in the US.

A disruption in supply from China and Mexico — or a sudden price hike — would disrupt these firms’ production within the United States. It would also make their products less competitive. For example, if US automakers were forced to pay more for steel, they would be less competitive vis-à-vis imports from Japan, Korea, and Europe. Does America’s national interest lie in protecting the American steelmakers and steelworkers selling to US-based automakers? Or does it lie in keeping American-based auto plants competitive by giving them access to the least expensive supplies? The same goes for US firms importing semiconductors and other parts for their computers and other electrical and electronic products.

The bottom line is that it’s impossible to hit imports from China and Mexico without doing a lot of damage to US firms and their employees who use those imports.

About the author: This article originally appeared in The Oriental Economist Report. Richard Katz is Editor-in-Chief of The Oriental Economist Report. He is also a special correspondent for the Weekly Toyo Keizai, a leading Japanese weekly business magazine published by Toyo Keizai.

Posted by Richard Katz