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Damages of Increased Tariffs

China never lacks sincerity. As for China-US economic and trade frictions, China has always exercised great restraint and made careful preparations for negotiations with great sincerity

by Cheng Xueyuan

For more than a year, the trade dispute between China and the United States has caused concern and even panic in both countries and the international market. The US tariff increase on China has reduced the total trade volume between China and the US, but the bilateral trade deficit remains basically unchanged. It didn’t help, as the Trump administration promised, reduce the trade deficit, while it is more likely to severely dampen business and financial market sentiment, disrupt global supply chains and jeopardize the expected recovery in global growth in 2019. So what exactly are the damages of Trump administration's willful tariff increases?

1. To consumers

American and Chinese consumers are both victims of the trade war, but clearly the average American consumers will suffer more. First, American importers bear almost all the costs of higher tariffs. Some of the cost of tariffs would be passed on to US consumers, while importers see lower margins. Further tariff increases may foreseeably be passed on to consumers. This phenomenon will inevitably lead to inflation in the long run, which will cause more serious damage to low-income families in the United States.

According to the National Bureau of Economic Research, tariffs imposed by the United States on its trading partners in 2018 cost American consumers and producers $68.8 billion a year. On May 20, 173 US companies, including footwear giants like Nike, Adidas, jointly signed an open letter to President Trump, hoping that he reconsider imposing tariffs on shoes manufactured in China, emphasized the "catastrophic" damages to be brought to American consumers, U.S. companies and the entire American economy.

2. To producers

China's economy and manufacturing industry are now so large and so integrated into the international economic system that it is almost impossible to isolate China from key sectors of the economy. Statistics show that the trade imbalance between China and the United States is not only attributed to Chinese enterprises, but also a large number of foreign-invested enterprises in China, especially American enterprises in China. Research from third parties, such as Deutsche Bank, also pointed out that for a long time, the United States has actually gained more net commercial benefits from bilateral trade with China than China itself. U.S. and Chinese producers affected by the tariffs and those using these goods as intermediate inputs are potential losers. Moreover, trade barriers arising from tariffs will disrupt global supply chains, slow the spread of new technologies, and ultimately lead to lower global productivity and reduced welfare.

3. To the world economy

According to the report of IMF, with all China-US trade taken into consideration, a trade war between the two countries is expected to, reduce global GDP by one-third of a percentage point, half of which is caused by lower business and market confidence. Trade war initiated by the US will not only damage the interests of China, but that of other countries such as the European Union, Japan and South Korea, which may also have different degrees of trade friction with the US. Such trade disputes, if cannot be resolved in industries, (for example, the automobile industry of Germany and Japan) could further weaken the business and financial market confidence, negatively impact emerging market bond spreads and exchange rate, and lead to a slowdown in investment and trade.

China never lacks sincerity. As for China-US economic and trade frictions, China has always exercised great restraint and made careful preparations for negotiations with great sincerity. Since last December, relevant consultations have been held for 11 consecutive rounds. Despite the serious setback of the 11th round of consultations caused by the US tariff action, the Chinese consultation team still went to Washington. China's sincerity in promoting the consultations is obvious to all. But China is unlikely to trade principled issues for core interests, and will not make concessions on major issues of principle.

China is ready to work with all countries, including Sri Lanka, to firmly oppose trade bullying, safeguard and promote the building of an open world economy and economic globalization, inject more certainty into an uncertain world, and build a community of shared future and common interests through win-win cooperation.

(to be continued...)

The writer is Chinese Ambassador to Sri Lanka

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