Consumers and industry casualties in superpowers trade war

No nation was ever ruined by trade – Benjamin Franklin

As negotiations fell apart with China last week, President Donald Trump threw another volley in the trade battle between the two superpowers, hiking trade duties from 10 to 25 percent on another $200 billion of Chinese goods.

China quickly retaliated. It plans to raise tariffs from 5 and 10 percent to up to 25 percent on $60 billion of goods, on about 5,000 products and services, imported from America starting June 1, the Ministry of Finance said in a statement Monday.

That’s not all. The White House is talking about raising tariffs to 25 percent on all of China’s remaining imports, about $290 billion worth of products.

No end in sight

This latest scuffle between the two largest trading partners in the world dashed any hopes that an end is in sight to the trade skirmish that started in March 2018 with the first round of three rounds of tariffs.

“The worry is that the current administration is approaching these problems with a single remedy and that it is beating China over the head with tariffs until we can establish a bilateral trade relationship that benefits the United States,” said Dennis Hoffman, director of the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University. “If that is the end goal, it is going to be very difficult to get to that end.”

Businesses and consumers likely will feel the most pain, a flurry of economists warned on national news outlets over the weekend. The latest round will impact Chinese-made imports including furniture, handbags, luggage, clothing, Christmas decorations, fire alarms, laptops, smartphones, seafood, laptops, metals, cosmetics, and more.

“The short-term impacts of this kerfuffle with the U.S. and China over trade are hard to predict,” Hoffman said. “I think the long-term impacts are very easy to predict and they are all pretty much negative.”

Many industry sectors are voicing concern: farmers and ranchers, chemical companies, semiconductor companies, and manufacturers.

Mostly losers, few winners

A new study by the Trade Partnership lays out what the impacts will be on American jobs, families and the economy. The partnership, which analyzes the impact of trade to improve corporate, industry and national competitiveness, looked at the estimated impacts of actual and threatened tariffs on the U.S. economy and U.S. workers one to three years after they are in effect. Key findings include significant reduction in U.S. GDP and the net loss of millions of U.S. jobs.

The new round of tariffs, combined with earlier duties from the Trump administration, will cost almost one million jobs — an estimated 934,700 U.S. jobs — and reduce the GDP by 0.37 percent, the analysis shows. The cost to the average American family of four? About $767 annually. Arizona will see a loss of about 18,500 jobs, according to the Trade Partnership analysis.

If the U.S. takes it one step further and implements tariffs on more goods as the president has indicated, those numbers swell dramatically, the study shows.

President Trump downplays fears

Trump downplayed any fears, touting the breakdown as a partisan play on China’s part.

On Saturday, he tweeted: “I think that China felt they were being beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky & have a Democrat win – in which case they would continue to rip-off the USA for $500 Billion a year….”

He promised another $15 billion in farm subsidies to add to last year’s $12 billion for losses to soybean and corn farmers from the trade battle.

“We don’t have to make business with them. We can make products right here like we used to,” Trump told the national press corps after the trade talks ended.

That was little solace for Arizona and U.S. businesses that already are paying the price for the administration’s protectionist policies.

In addition, two-way foreign direct investment flows between the U.S. and China dropped nearly 60 percent in 2018, according to a new report by the Rhodium Group, an independent research firm that analyzes disruptive global trends. Trade dropped to $18 billion from $46 billion in 2017 and $60 billion in 2016. The vast bulk is due to China no longer investing in U.S. regulatory interventions and deteriorating political relationships are cited as the main culprits.

Arizona has much to lose

The standoff between the two countries threatens many sectors in Arizona including agriculture, energy and technology. China is the state’s third largest trading partner, behind Mexico and Canada. Chinese tourism is a significant driver for the economy here. Arizona ranks 12th in the country for international students.

Among those reporting concerns:

Agriculture

Farmers and ranchers are feeling stress on both the production and consumption end of business, said Stefanie Smallhouse, president of the Arizona Farm Bureau.

“With every setback in trade negotiations or approval, whether it be with China or the USMCA (United States Mexico Canada Agreement), the commodity markets react adversely and swiftly,” Smallhouse said.

Most negatively impacted are dairy, small grains, tree nuts, dates, pork, beef and cotton, she said.

“The ongoing tariffs on steel and aluminum are increasing our production costs and the new tariffs will impact our purchasing power just like every American. China will retaliate against agriculture as everyone does, because you aim for the heart,” she said.

The gains that Arizona agriculture has made in the last several decades are “being wiped out in a matter of months,” Smallhouse said. “We need the administration and Congress to forgo partisan politics and think about the long-term stability of food and fiber production in this country. These negotiations must move faster and keep our farmers and ranchers competitive on the world stage.”

Colleges and universities

While Arizona colleges and universities are still a popular destination for foreign students, the annual Open Doors education report released last November shows that the trade relationship is affecting new enrollment nationally. New student enrollments fell by 6.6 percent in 2017-18, corroborating findings from the 2017 fall enrollment survey and continuing a slowing or downward trend first observed in the 2015-16 academic year.

Arizona ranks 12th in the country for international students, who spend an estimated $717 million in the state, the report shows. Of the 23,000 students, more than 35 percent are from China, according to the Open Doors report.

Not only do they pay full out-of-state tuition, but they buy goods and services while they are here. International students are estimated to have spent a total of $200.2 million per year, excluding tuition, in Arizona in fiscal year 2018, according to a November study by the Seidman Research Institute. Many Chinese students are top tier talent and end up staying in Arizona. Frayed international relations are putting that talent at risk.

Semiconductor industry

Executives at technology and semiconductor companies expressed worry about the latest trade development including Microchip Technology, a $21 billion semiconductor company based in Chandler, Arizona.

Executives at Microchip Technology told CNBC last week that the trade war is having a crippling effect on the industry’s ability to forecast sales and set pricing.

“Just imagine if you were a supplier. And you didn’t know whether you’ll be able to pass on a 25 percent tariff increase to your customers. Whether your customer will then choose to buy that product from Korea or Taiwan or somewhere else and not from the Chinese supplier,” Microchip CEO Steve Sanghi said.

Other solutions more effective

It’s difficult to see the benefits of tariffs, economists said.

“Trade benefits everyone,” ASU’s Hoffman said. “The facts around international trade is that a healthy trade relationship globally — not just bilaterally — tends to improve standards of living around the world. It leads to global economic growth and provides opportunity for businesses to expand worldwide.”

Companies already are finding ways to get around the tariffs by having products manufactured in China and finished in other countries where there are no tariffs in place, he said. That leaves economists wondering what’s the point. There are other methods to force China’s hand that don’t impose harm on U.S. industries and families.

“We oppose China’s unfair trade practices. But tariffs are not the right approach,” Derek Scissors, a resident scholar at the American Enterprise Institute, writes in the Rundown, the Washington D.C.-based think tank’s daily news analysis.

“Large SOEs (state-owned enterprises) are the inevitable beneficiaries of illicit IP transfer, the biggest recipient of subsidies, and the key instruments for the Party’s control of the economy. They are the proper targets,” Scissors said.

ASU’s Hoffman said the current populist, protectionist wave taking hold in the U.S. and other countries is misguided and long outdated, he said.

The “winner-takes-all mentality” around all trade has proven fatal in times past, including tariff increases that were partially to blame for the Great Depression, he said.

“It’s unfortunate that President Trump is going forward with this idea that was left in the 60s. But unfortunately, it’s not an idea from the 1960s, it’s an idea from the 1760s,” Hoffman said. “This populist protectionism has been resurrected and I don’t see it going away. The notion is alive and well in the current administration and among many Democrats, too. The fear I have is that we’re liable to get protectionist or quasi-protectionism no matter who wins the election in 2020.”

Victoria Harker

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