Question

Do you believe that a trade war between the United States and China is winnable or not? Explain.

Answer 1

But the average tariff is a tricky measure. Economic theory argues that tariffs have overwhelmingly negative repercussions on consumer and producer welfare. example, a doubling of a tariff would result in the welfare loss more than doubling. A tariff of 25% on a small share of trade is therefore much more severe than a tariff of 3% on average. Many countries have high import tariffs on a number of specific goods, with a rate above 15 percent usually considered a "tariff peak," but whereas those peaks relate to less than 1 percent of total imports for most industrialized countries, they cover a much larger share of U.S. imports.

In addition, Trump's tariffs discriminate against China: Chinese companies only pay the 25 per cent tariff, not their European, Latin American, or Asian counterparts. Such a country-specific tariff is tantamount to levying a general tariff on all imports while offering export incentives to rival manufacturers outside of China–with this subsidy being charged by U.S. consumers in the form of higher prices. Since non-Chinese producers can raise their prices by up to 25 percent and remain competitive in the U.S., prices are likely to rise on a wide range of goods for American consumers.

Therefore, the indirect effect on consumer prices of Trump's China tariffs is likely to be much greater than the recent estimate of a direct impact of only 0.1 per cent. Such indirect harmful consequences of country-specific tariffs are the main reason why a pillar of the global trading system has long been the "most favored nation" concept. Although China has previously placed a reciprocal tariff of 25 per cent on many of its U.S. imports, the negative impact on the Chinese economy is likely to be limited as U.S. goods account for less than one-tenth of China's total imports. Therefore, Chinese retaliatory tariffs have a slight effect on the Chinese economy.

In particular, Trump has put Chinese tech giant Huawei on the list of companies to which US businesses are barred from exporting American products. True, Trump has also said that U.S. suppliers should be getting the licenses needed to continue supplying Huawei for the time being. But from now on, U.S. technology firms must clearly think twice before entering into long-term contracts with Huawei or other prominent Chinese firms that could risk being included on the "entities list."