During the 2016 election, one of the main highlights of President Trump’s campaign was that the current trade policy is hurting the U.S. economy. He conveyed that free trade agreement such as NAFTA and TPP is ‘stealing’ Americans’ jobs since U.S. corporations are outsourcing their jobs overseas; President Trump hopes to bring back those ‘stolen’ jobs and improve the welfare of domestic producers through an absurd amount of tariff placed on imported goods from Mexico and China. For example, he stated that he would place a tariff as high as 45% on goods imported from China (1). Although at first glance, this plan may seem to bring back the jobs to the U.S. through motivating U.S. consumers to buy domestic products; in reality, this policy will hurt both the U.S. consumers and producers in the long run.
For starters, the United States is the de-facto net importer on trade with China. According to statistics from Panjiva and the Commerce Department, the U.S. imported $484 billion worth of goods from China while only exporting $125.3 billion of goods to the Chinese Republic (2). Now, the way President Trump stated that China is ‘killing’ us on trade, as if we literally lost $358.7 billion in trade, is simply false. Both United States producers and consumers benefited from this trade; consumers get lower prices on goods such as electronic and clothing goods while China is one of the biggest consumers for U.S. airplanes; Industries, such as Boeing employs 150,000 U.S. workers and China has indicated that they are willing to buy over 6,800 airplanes from Boeing for the next 20 years — a market that is worth more than $1 trillion (3).
The current trade deficit that the United States experience with China can be explained by a simple economic concept: wage. For example, the hourly minimum wage in Beijing, the capital city of China, is 21 RMB ($3.05) (4). In comparison, the hourly federal minimum wage in the U.S. is $7.25, more than twice as expensive as the wage in China. Some states in the United States, such as California, has an even higher minimum wage. California’s current hourly minimum wage is $10.50 which will increase to $15 at the beginning of 2022 (8). Thus, since the labor cost is smaller in China, the goods that are imported from China will be cheaper and therefore more U.S. consumers will be able to buy their products. Therefore, when it comes to common goods like clothing and toys, it is very unlikely that U.S. produced goods will ever break into the Chinese market due to the high labor costs associated with the goods, compared to the Chinese-produced goods.
The 45% tariffs on Chinese goods will be a burden on the American consumers; the price of electronic goods such as iPhones, laptops, computers are going to skyrocket and U.S. consumers will be made worse off. Domestic producers will be able to raise their prices due to temporary shortages that is detrimental to U.S. consumers. Specifically, the tariff could cost United States consumers an additional $2,200 per year through 11% increase in price of American goods because imported goods will become more expensive (6). Moreover, if the intent is to bring jobs back to the U.S., companies such as Apple can easily switch its manufacturing base to another country such as Ethiopia which has 50% cheaper labor cost than China (5). History supports these facts as well. For example, when Obama raised tariffs on Chinese tires in 2012, it temporarily brought back 1,200 jobs to the United States. However, this policy resulted in a total cost of $1.1 billion to consumers due to higher prices (7).
The trade war will hurt U.S. producers as well. The airplanes, soybean, and automobile industries, which are the top three exports from U.S. to China, will suffer as well (2). Companies such as Walmart that sells a lot of imported cheap goods will suffer as well due to the higher prices. China will stop buying the more expensive airplanes from Boeing and the U.S. $1 trillion-airplane industry would easily be switched to Airbus from the European market. China could stop buying soybeans (the number two exports to China after airplanes) from the U.S. and turns to Brazil instead (2). In the long run, These U.S. domestic producers that heavily rely on export to China will have to cut back its workforce and eventually hurt the U.S. economy.
Trade war is not a zero sum game; it is not a situation where the jobs that China ‘loses’ will completely come back to the United States. United States corporations can easily change their outsourcing countries and China could easily target different countries it wants to import items such as soybeans and airplanes from.The tariffs suggested by President Trump and, thereby the ensuing trade war, is not going to benefit either country; not the United States, and certainly not U.S. consumers who will take the burden of higher costs. We cannot afford to go into a trade war because of poor economics.
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1. Haberman, Maggie. “Donald Trump Says He Favors Big Tariffs on Chinese Exports.” The New York Times, The New York Times, 7 Jan. 2016, Web. 27 Mar. 2017.
2. Gillespie, Patrick. “What's at Stake for U.S. in a Trade War with China.” CNNMoney, Cable News Network, 19 Jan. 2017, Web. 27 Mar. 2017.
3. Nie, Winter. “Why America Would Lose a Trade War With China.” Fortune, Fortune, 21 Dec. Web. 27 Mar. 2017.
4. “China Minimum Wage 2016-2017.” China Minimum Wage 2016-2017, WageIndicator, Web. 27 Mar. 2017.
5. Durden, Tyler. “The End Of Cheap China - 16 Emerging Low Wage Economies.” ZeroHedge, ZeroHedge, 23 June 2016, Web. 27 Mar. 2017.
6. Luhby, Tami. “Trump's Tariffs Will Cost Americans Thousands, Report Says.” CNNMoney, Cable News Network, 19 May 2016, Web. 27 Mar. 2017.
7. Soergel, Andrew. “Trump's Rumored Tariff 'Going to Be Perceived as a Trade War'.” USNews, USNews, 22 Dec. 2016, Web. 27 Mar. 2017.
8. “Timeline of Minimum Wage Increases in California.” Los Angeles Times, Los Angeles Times, 28 Mar. 2016, Web. 27 Mar. 2017.