The Edge - Volume One

One of President Trump’s key campaign promises was to challenge trade agreements particularly those with which the U.S. runs a trade deficit. As of August 2018, the U.S. merchandise trade deficit with China stood at a record $38.6 billion. Tariffs come to the fore Relying on Section 301 of the Trade Act of 1974, the U.S. proposed tariffs on steel and aluminum imports from China, Canada and countries in the European Union (EU) in March 2018. The U.S. administration articulated that the tariffs were needed to safeguard national security and the intellectual property of U.S. businesses, and to lessen the U.S. trade deficit with China. While these tariffs were levied on China in March, some key U.S. trade partners were initially exempted from those tariffs, including the European Union, Canada and Mexico. However, by June 2018, those exemptions were revoked. In July 2018, the U.S. levied higher import duties on $34 billion worth of goods and products from China, to which China responded with similiarly sized excise duties on imported U.S. goods and products. In August 2018, the U.S. administration imposed a 25 percent tariff on a further 279 Chinese products worth $16 billion a year. China immediately followed this move by levying higher tariffs on goods and products from the U.S. worth the same amount – 25 percent on $16 billion a year. In the latest round of higher import duty implementation, additional tariffs on $200 billion of Chinese goods imported into the U.S. went into effect in September 2018. China has responded to this move by raising tariffs on $60 billion of goods imported from the U.S. Sound the alarm? Not quite, but caution and consideration needed In its latest World Economic Outlook report published in July 2018, the International Monetary Fund expected the cost of the building trade tensions to be around $430 billion, or 0.5 percent of world GDP. With the trade dispute landscape having moved on since then, this figure seems conservative now. What’s more, due to the tight integration of global supply chains and financial markets, its economic impact could spread well beyond the two involved parties. When looked at from both Chinese and U.S. viewpoints, the higher-tariffed goods now represent 3.9 percent and 6 percent of each country’s global exports, respectively – no small percentages for either important center for global trade and business (Figures 3 and 4).

Figure 2: The U.S. August merchandise trade deficit with Mainland China in current dollars (Aug 1986-Aug 2018)

$ Billion

-$5 $0 $5 $10 $15 $20 $25 $30 $35 $40

Aug 1988

Aug 1992

Aug 2012

Aug 1986

Aug 1994

Aug 1996

Aug 1998

Aug 2016

Aug 2018

Aug 1990

Aug 2014

Aug 2010

Aug 2008

Aug 2002

Aug 2004

Aug 2006

Aug 2000

Source: U.S. Census Bureau, Cushman & Wakefield Research

Figure 3: Major global export categories – Mainland China and the U.S. (2017)

Mainland China

Mainland China

Electrical-mechanical products, 58.2% Articles of apparel and clothing accessories, 6.9% Automatic data processing equipment and components, 6.8% Wireless telephone handsets and parts, 6.3% Textile yarn, fabrics, made-up articles and related products, 4.9% Furniture and parts thereof, 3.3% Iron and steel, 3.2% Agricultural products, 3.2% Automobiles, 2.9% Others, 4.3%

Total Export Volume: $1.6 trillion

The U.S.

The U.S.

Machinery and Transport Equipment, 31.2% Re-Exports, 15.2% Chemicals and Related Products, 12.6% Mineral Fuels and Lubricants, 10.8% Miscellaneous Manufactured Articles, 7.6% Manufactured Goods by Material, 6.8% Food and Live Animals, 6.3%

Total Export Volume: $1.1 trillion

Crude Materials Except Fuels, 4.7% Miscellaneous Commodities, 4.1% Beverages and Tobacco, 0.4% Animal and Vegetables Oils, 0.2%

Source: General Administration of Customs, P.R. China, Bureau of Economic Analysis, Cushman & Wakefield Research

53