New Report Finds Trade War is a Lose-Lose for U.S. and China

By Erica York of The Tax Foundation.

"A new report from the United Nations Conference on Trade and Development (UNCTAD) assesses the impact of the U.S.-imposed tariffs on imports from China, United States import prices, and United States imports from other countries. The findings provide empirical evidence for what economists generally expect to happen when bilateral tariffs are imposed: reduced trade, higher prices for consumers, and trade diversion. The report concludes that the U.S.-imposed tariffs are economically damaging to both the United States and China.

A quick review: tariffs are imposed to make foreign-made goods relatively more expensive than domestically produced goods in order to shift demand away from foreign-made goods. Further, if tariffs are imposed against a single country, they are likely to divert trade to other countries where the tariff can be avoided.

The UNCTAD study measures these effects by examining the differences between goods that were subject to the first two rounds of U.S. tariffs (25 percent tariff on $50 billion and 10 percent tariff on $200 billion—for more details, view our tariff tracker) and goods that were not subject to the tariffs from Q1 2018 through Q2 2019.

The authors of the UNCTAD study point out that negative economic effects often happen together: imposing a bilateral tariff is likely to lead to a combination of higher prices for consumers, lower profits for exporters, and trade diversion that benefits other countries. Here are some of the key findings from the UNCTAD study:

• U.S.-imposed tariffs led to a 25 percent decline of imports from China (about $35 billion) of tariffed products in the first half of 2019.
• The average impact of tariffs appears to have increased over time, as the differential between tariffed and non-tariffed goods grew larger the longer the tariffs had been imposed. This reached a high in the Q2 2019. For example, the study finds the differential impact in the value of goods subject to the first round of tariffs versus those not affected was 22 percent in Q3 2018 and increased to about 45 percent in Q2 2019. The authors cite this as evidence that tariffs are the main factor behind the fall in U.S. imports from China.
• U.S. tariffs did not have any effect on Chinese export prices until Q2 2019, when export prices for goods subject to tariffs were about 8 percent lower. Tariffs can lead to higher consumer prices (the burden would fall on consumers) and/or lower export prices (the burden would fall on exporters). By not lowering export prices, the burden of the tariff has so far fallen primarily on U.S. consumers.
• Trade diversion effects (importing the same goods from other countries not subject to tariffs instead of from China, where the goods would face tariffs) totaled $21 billion for the first half of 2019, which replaced about 63 percent of the decline in imports from China. The largest beneficiaries of trade diversion were Taiwan, accounting for $4.2 billion additional exports to the U.S. in the first half of 2019; Mexico, $3.5 billion; the European Union, $2.7 billion; and Vietnam, $2.6 billion.
• While trade diversion made up for about $21 billion of the $35 billion decline in imports from China, the remaining $14 billion “was lost due to lower demand in the United States and/or not enough capacity from the rest of the world.”

This study confirms that U.S.-imposed tariffs are causing economic harm to both the United States and China. The harm in the United States is primarily driven by higher prices for consumers, while the harm to China is related to export losses. The authors note that including the recently imposed tariffs in the calculation of economic harm would add to the existing losses measured in the study. The impact of Chinese tariffs on U.S. imports would likely be analogous to American tariffs on Chinese products—higher prices for Chinese consumers and losses for U.S. exporters."