Trump's 2019 Protection Could Push China Back to Smoot-Hawley Tariff Levels

Following the failure of their trade negotiations on May 9, the United States and China have escalated  the trade war initiated by President Trump. In the first phase of the war, during 2018, the United States imposed tariffs on $250 billion of Chinese exports. China immediately retaliated with tariffs on $110 billion of US exports. Then, when talks hit a snag this month, Trump abruptly increased the tariffs imposed last September on $200 billion of Chinese imports from 10 percent to 25 percent.  In response, China announced its intention to increase on June 1 the tariffs covering some of the $60 billion of US exports it had already hit in September. The Trump administration has also begun the process expected to lead to a 25 percent tariff on most of the US imports from China so far untouched by his trade war.

Should President Trump follow through with these additional tariff threats, taxes would go up on a vast array of imported consumer products—like clothing, shoes, toys, and electronics—previously spared by his actions. Taken together, such steps would also raise US tariffs on China to levels similar to those resulting from the infamous Smoot-Hawley Tariff Act of 1930 enacted on the eve of the Great Depression.

The charts here illustrate just how dramatic the 2019 tariff actions are.

Trump’s next tariffs on China could approach Smoot-Hawley levels of the 1930s

Before Trump’s 2018 actions, US  tariffs on imports from China  averaged 3.1 percent (figure 1).

In 2018, Trump imposed three major sets of tariffs on China alone. The first announcement of tariffs on imports of $50 billion included 25 percent tariffs, first on $34 billion (imposed July 6) and later on $16 billion of imports (imposed August 23).  Then, on September 24 he imposed 10 percent tariffs on a separate set of imports of approximately $200 billion. When Trump was done applying his 2018 tariffs—on $250 billion of imports from China, as well as imports of steel, aluminum, solar panels, and washing machines from all countries—average US tariffs toward China had increased to 12.4 percent.

On May 10, 2019, Trump increased his tariffs on that $200 billion of imports from 10 percent to 25 percent. Once those tariffs are fully in effect,[1] the United States will apply an average tariff toward China of 18.3 percent.

Finally, if Trump follows through with his threat to impose a 25 percent tariff on most of the rest of US imports from China, the average US tariff toward China would increase to 27.8 percent.[2]

Trump is thus threatening tariffs on China that are not far from the average level of duties the United States imposed with the Smoot-Hawley Tariff Act of 1930. As another point of comparison, if China were not a member of the World Trade Organization, it would currently face a US tariff of roughly 38.6 percent. [3]

From China’s perspective, there is one important way in which Trump’s tariff escalation is worse than the US protectionism of the 1930s. In the 1930s, the United States applied the Smoot-Hawley tariffs to imports from all trading partners. To date, Trump’s actions show that China is being discriminated against in the US market far more than most other foreign suppliers. At least for the moment, US tariffs toward most all other major economies remain relatively low—on average 3 to 4 percent.

President Trump highlighted the competitive disadvantage that his policies are thrusting on China with a series of tweets on May 13:  “Also, the Tariffs can be completely avoided if you buy from a non-Tariffed Country, or you buy the product inside the USA (the best idea). That’s Zero Tariffs. Many Tariffed companies will be leaving China for Vietnam and other such countries in Asia. That’s why China wants to make a deal so badly!”

US special protection toward China is not new, but it now covers more imports than at any point since the 1980s

The additional US tariffs of May 10 hit products already covered by the 10 percent duties Trump imposed in 2018. Overall, over 50 percent of US imports from China had become subject to special US trade protection by the end of 2018 (figure 2). Earlier protectionist actions  covered not only the products hit by Trump’s tariffs on $250 billion of imports from China but four other sets of US special tariffs imposed over the year, including on steel, aluminum, solar panels, and washing machines.

The Trump administration’s actions in 2018 and 2019 are thus noteworthy not only because of the size of the tariffs imposed but also because of the amount of imports impacted. The United States has imposed special protection on imports from China for decades. But the long, historical view shows the enormous scope of the 2018 tariffs.

The one-year increase of over 42 percentage points—from only 8 percent of imports from China at the end of 2017 to over 50 percent in 2018—was massive. No increase in import coverage since 1980 is even comparable; the next largest was an 8-percentage point increase in 1986, when US special protection peaked at covering 39 percent of US imports from China.

The only thing that would be comparable is if Trump follows through with his current threat to impose tariffs on the rest of US imports from China. That would lead to an increase of over 46 percentage points—from current levels of 50.6 percent of imports to 96.7 percent.

The one other major difference between today and 1986 is the level of trade affected because of the rising interdependence between the two economies. In 2018 dollars, US total goods imports from China in 1986 were only $8 billion—1.4 percent of US goods imports and 0.1 percent of US GDP. In 2018, US imports from China were $540 billion—21.2 percent of US imports and 2.6 percent of US GDP.

Trump’s next round of tariffs could mostly hit consumer goods—just like the 1980s protection

In terms of the types of products targeted, Trump’s next round of tariffs on China could also replicate  earlier episodes of US special protection. As figure 3 indicates, his next round of tariff escalation would hit consumer goods like toys, footwear, and clothing.

Until now, these products have mostly been spared by Trump’s tariffs. The latest trade actions take the United States back to the 1980s, when almost all such special protection imposed on China hit textile and apparel imports. The context has changed since then. In 1986, clothing and fabrics made up 43 percent of China’s exports to the United States. Today, only 8 percent of China’s exports to the United States fall into those product categories.

Will Trump’s protection reach 1980s—or even 1930s—levels?

During the 2016 campaign, Trump threatened that as president he would impose 45 percent across-the-board tariffs on China. Following through with even his latest threat would not yet achieve those tariff levels, but they would inch closer.

These figures add up to a startling conclusion. The most recent US tariff intensification with China could be a turning point—for the worse—in Trump’s ongoing trade war. The latest steps will impose new costs on the American economy and will introduce even more uncertainty about Trump’s end game. Is his objective to negotiate a trade deal, or is it to make tariffs on Chinese goods a new normal in US-China relations?  The only certainty at this stage is that Trump’s tariffs are escalating toward historic levels.

Authors’ note: Some of the analysis in this post was previously presented in Bown and Zhang (2019).

References

Bown, Chad P. 2019. The 2018 US-China Trade Conflict After 40 Years of Special Protection. PIIE Working Paper 19-7. (Also forthcoming in China Economic Journal.) Washington: Peterson Institute for International Economics.

Bown, Chad P., and Douglas A. Irwin. 2018. What Might a Trump Withdrawal from the World Trade Organization Mean for US Tariffs? PIIE Policy Brief 18-23. Washington: Peterson Institute for International Economics.

Bown, Chad P., and Melina Kolb. 2019 (last updated May 10). Trump’s Trade War Timeline: An Up-to-Date Guide. Washington: Peterson Institute for International Economics.

Bown, Chad P., and Eva Zhang. 2019. Will a US-China Trade Deal Remove or Just Restructure the Massive 2018 Tariffs? PIIE Trade and Investment Policy Watch (April 24).

Notes

1. Technically, those tariffs only apply to US imports from China that were also exported after May 10, 2019. The prior tariffs of 10 percent apply to “on the water” products exported from China before May 10, 2019, provided they arrive in the United States prior to June 1, 2019, according to the Federal Register. In a subsequent Federal Register notice, the administration changed the June 1, 2019 deadline to June 15, 2019.

2. The Federal Register notice indicated “The proposed product list has an approximate annual trade value of $300 billion. The proposed product list covers essentially all products not currently covered by action in this investigation. The proposed product list excludes pharmaceuticals, certain pharmaceutical inputs, select medical goods, rare earth materials, and critical minerals. Product exclusions granted by the Trade Representative on prior tranches from this investigation will not be affected.”

3. These are the “Column 2” tariffs in the Harmonized Tariff Schedule; for more detail, see Bown and Irwin (2018). The main distinction between the non-WTO member tariff rate in figure 1 (38.6 percent) and the one in Bown and Irwin (28.1 percent, table 1) lies in how each computes the trade weights. The trade weights in figure 1 are product-level Chinese exports to the world, as are the rest of the weights. In Bown and Irwin, the trade weights are product-level US imports from the world.