President Trump’s tariffs on Chinese goods, much vaunted on the campaign trail, were implemented in January 2018. Last week saw the introduction of a new 25% levy on Chinese goods worth $34 billion, accompanied by further threats of 10% tariff on Chinese imports to the US worth $200 billion. Imports from China into the USA have increased more than sixfold in the last twenty years, with the US trade deficit with China currently at $336 billion. ‘Made in China 2025’, the Chinese government drive to dominate the global market in 10 sectors, would appear to stand in contention with Trump’s ‘America First’ policy.
Trump’s trade deficit reduction strategy neglects to address other headwinds faced by the US manufacturing industry, for example relatively higher wages and US firms’ failure to increase productivity through the adoption of new technologies. Many technology experts in the US, including the National Advisory Committee on Semiconductors lament that the US is no longer at the forefront of technology innovation.
Machinery and electronics as a proportion of total US imports from China have increased dramatically in the two decades shown, from 26% in 1997 to 48% in 2016. Although this increase reflects China’s shift towards the manufacture of high-technology, high-value goods, research has shown that 87% of electronics products now subject to Trump’s tariffs, are produced by multinationals and via joint ventures rather than Chinese firms. Indeed, many economists have argued the tariffs could do more harm than good, by increasing the cost of living for many Americans.
Trump has compared his trade policy to Ronald Reagan’s in the 1980s, when Reagan placed high tariffs on Japanese goods. However, Reagan’s policy failed to reduce the trade deficit with Japan, as decreased demand for Japanese computing equipment devalued the yen, making tariff-free Japanese products far more appealing.
Were Trump’s tariffs implemented a decade ago, their effect on China would have been far more profound. In 2007, 35% of Chinese GDP derived from exports, whereas in 2017 it has fallen to 18.5%. The United States receive 19% of all Chinese exports, but China is far less dependent on its export market now as burgeoning domestic consumption has risen to half of GDP and 78% of its Q1 growth this year.
However Chinese telecommunications firm ZTE’s recent dealings with Iran in contravention of US sanctions has led the US to impose a ban on the company, prohibiting it from buying from American suppliers for seven-years. This combined with the new tariffs will no doubt have an impact on China’s economy and a direct effect on the sectors contributing to the ‘Made in China 2025’ program, particularly the high-tech industry. Whether US consumers will shift their spending in line with their government’s aims is uncertain.