Trump tariffs are based on flawed doctrines, which could penalize the US as much as its trade deficits.
Last Friday, President Trump threatened to impose tariffs on $267 billion in Chinese goods, on top of the additional $200 billion that he said will likely be hit with import taxes in a matter of days.
If the tariff stakes will increase up to $500 billion, it could penalize Chinese GDP by 1%, but the US GDP, which is relatively more vulnerable, would suffer a net impact of 2% of GDP. In dollar terms, the consequent tariff damage could prove even higher than the current U.S. trade deficit with China and thus double the damage.
The Trump administration‘s trade doctrine makes little sense in the 21st century.
“Made in China” does not capture value-added
In the pre-1914 era and during the protectionist interwar period, global integration plunged. As major corporations competed largely in home markets, their value activities were mainly domestic. Following World War II, the US-led Bretton Woods system ensured a greater degree of internationalization – including systemic US trade deficits since 1971, decades before deficits with China.
Meanwhile, US multinational companies have cut costs through offshoring as large chunks of productive capacity has been transferred to emerging markets since the 1980s, especially in Asia. So today the “eco-systems” of US multinationals are increasingly global.
Here’s Trump’s dilemma in a nutshell: While tariff wars were typical to the era of domestic competition a century ago, they do not work in a more global era. Even “made in China” products feature diverse value-added inputs by multinational companies producing in, exporting from and selling in China.
Since iPhone alone accounts for some $16 billion of the U.S. trade deficit with China, let’s use it as an example. According to data (IHS Markit and Reuters), the initial sale price of Apple’s iPhone X (64BG) was $999. The Trump administration’s tariffs are based on the idea that since this smartphone is made in China, all value-added is captured in China and thus it must be penalized by heavy tariffs.
