How Trump’s trade war with China could affect us all

North West

As the US trade war with China looks set to escalate, Dr Tony Syme, expert in macroeconomics and international finance at the University of Salford Business School, comments on what the impact might be and how it could reach much further than just the two countries involved.

Dr Syme said: “On Monday President Trump announced not only a second round of tit-for-tat retaliation, but an escalation: tariffs on $200bn of Chinese goods. China’s Commerce Ministry has already responded, saying they will adopt counter measures.

“What are the likely consequences of this impending trade war? Virtually all economists agree that restricting trade has damaging economic consequences for all countries that employ such policies, but the scale and the scope of the losses are potentially huge, not just for the U.S. and China, but also for countries not directly involved.

“Economists have used a computable general equilibrium (CGE) model to look a range of scenarios. The prediction is that, with the initial tariffs on $50bn of goods from both sides, the impact across the U.S. economy as a whole, net employment will fall by 134,000.

“They also considered a second round of tit-for-tat retaliation with $100bn in U.S. and Chinese tariffs. Under this Scenario U.S. employment will fall by 455,000.

“One benefit of employing a CGE model is that it can model the effects of tariffs upon supply chains and this is crucial in regard to China, who have been termed the ‘Great Assembler’.

“A well-known example of this is the iPhone. Manufacturing iPhones involves nine companies, located across South Korea, Japan, Germany and the U.S., and these companies ship the iPhone components to a company located in China, for assembly into final products and then exported to the US and the rest of the world. China is designated the exporter of a high-tech product, but that product was overwhelmingly made elsewhere.”

The contribution of the Chinese factories in this process is estimated to be only 3.6% of the shipping price, yet U.S. trade statistics attribute 100% of the value of imported iPhones to China and so hugely overstate the size of the U.S.-China trade gap.

Dr Syme continued: “The largest contribution to the construction of the iPhone in value added terms comes from Japan. This example highlights that any imposition of tariffs on Chinese goods will not only impact the Chinese economy. It will impact the global suppliers of goods that are assembled and re-exported from China so many countries will be adversely affected over and above the global steel and aluminium tariffs that have been imposed.

“President Trump needs to be very careful when considering whether or not to carry out his threat to escalate this trade war with China. While the full effect may not be felt until after the mid-term elections, it is predicted to have a very large negative effect with hundreds of thousands of jobs lost in U.S. agriculture and services. There may be short-term political gains, but this is an economic game with very few winners.”

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