The situation between the United States and China is tense, with new tariffs, threats of more tariffs, and growing fears that an all-out trade war may actually happen.
There has recently been some sign of softening in the rhetoric between the two nations, but until and unless there is real dialogue and meaningful change, the risk of an escalation remains.
Because it’s the world’s two largest economies involved, the stakes are especially very high. The World Bank estimates that in 2016, U.S. Gross Domestic Product was more than $18.6 trillion, while China’s was almost $11.2 trillion. It falls off quickly from there, with Japan at $4.9 trillion and Germany at $3.5 trillion. Clearly, what goes on in the United States and China will affect economic conditions worldwide.
For a number of years, many analysts and market watchers have agreed that China has been engaging in unfair trade practices ranging from dumping (selling products at prices lower than the variable costs needed to produce them) to failing to protect intellectual property. A number of complaints have been filed through the World Trade Organization by both the United States and China, and the commentary in tweets and speeches has at times ratcheted up the conflict.
The reason for the U.S. action is to force China to actually deal with these unfair trade practices, putting the pressure on with tariffs on imports of products from China. Chinese goods are thus more expensive to US consumers, decreasing demand for them here. In response, China has listed tariffs of its own for U.S. goods entering the Chinese market. Consumers in both nations therefore face higher prices, and companies trying to export deal with lower demand.
According to the Office of the United States Trade Representative, U.S. goods and services trade with China totaled an estimated $648.5 billion in 2016, with $169.8 billion in exports and $478.8 billion in imports. China is our largest goods trading partner, with a two-way total of $578.2 billion (exports of $115.6 billion and imports of $462.6 billion). These are big numbers, representing a significant slice of the economies of both nations.
Looking specifically at what the United States sends to China, our third-largest goods export market in 2016, goods exports were $115.6 billion. That’s about eight percent of overall U.S. exports. The top export categories include miscellaneous grain, seeds, and fruit (such as soybeans); aircraft; electrical machinery; machinery; and vehicles. Other products appeared to be on the verge of expanding, including beef. As China implements tariffs, U.S. producers of products which are listed will almost surely see lower sales to that nation.
Here’s another wrinkle. China is a major holder of U.S. treasury securities. Data from the U.S. Treasury Department indicates that China’s holdings of such securities total almost $1.2 trillion. If China decided to dump these assets, there would be an immediate effect on financial markets. However, this scenario seems unlikely because it would be costly to the Chinese government and would have a limited long-term effect. More likely, the threat of dumping the securities will be used as a bargaining tool. Nonetheless, it complicates the situation.
For Texas, a trade war with China would also be a bad thing. The Foreign Trade Division of the U.S. Census Bureau estimates that a total of about $16.3 billion in Texas merchandise was exported to China in 2017. The largest category was oil and gas, with $5.7 billion. Chemicals exports totaled $3.4 billion, with another $1.7 billion in computer and electronic products. About $1.3 billion in machinery was exported, followed by about $1.1 billion in agricultural products. There are some businesses in Texas which would benefit from the tariffs, namely those who produce goods that compete with Chinese imports which will now be more expensive due to a tariff, but some major Texas industries and export products are now facing the possibility that their products will now be much more expensive in China, a country that is an important market.
Tariffs are never a good thing, harming both consumers and producers. Unfair trade practices are of course undesirable, but there are better and less disruptive ways of dealing with them than tariffs. It’s a risky strategy for both nations to take on the other, because the stakes are very high. Trade wars have a way of spreading, and the costs to the economy would be substantial.