A trade war ceasefire is just what America's economy needs

December 13, 2019
Photo Credit: 
REUTERS/Jonathan Ernst

The US Trade Representative's announcement of a "Phase One" trade deal between the United States and China is good news for the American economy.

The Chinese have agreed to purchase US agricultural products, energy, and manufactured goods and made commitments on intellectual property protection and currency management.

In exchange, President Trump agreed to reduce tariffs levied in September, including those on imports of apparel and accessories, as well as cancel new tariffs that were set to take effect on December 15. He retained the 25 percent tariffs on $250 billion in Chinese imports first imposed in 2018.

If Trump hadn't agreed to cancel the December 15 round of tariffs, the average US tariff rate on Chinese exports would have climbed to almost 24 percent—dramatically higher than the average tariff of 3.1 percent in place before the trade conflict began in July 2018.

An agreement will not only avoid the levy of new taxes on US imports of cell phones, laptops, and toys—products largely engineered, designed, and marketed in the United States—it will also preempt new Chinese retaliatory duties, including the re-imposition of tariffs on US autos and auto parts.

The December round of tariffs would have harmed American interests with very little impact on the Chinese economy. Of the estimated $160 billion of imports scheduled to be taxed on December 15, 60 percent would have been computers and other electronic devices, mostly cell phones and laptops. Most of these devices are assembled in foreign-owned factories operating in China like the Foxconn facilities that assemble Apple's iPhones. The upshot is that these tariffs would fall mostly on American technology companies and their suppliers, with little impact on Chinese producers suspected of unfair subsidies or technology theft. Certainly, lower sales for these foreign producers could cause layoffs of Chinese factory workers, but the tariffs would do little harm to key players behind China's drive for technological innovation.

New tariffs are not only ineffective, they are costly for America. The continuing strength of the overall US economy belies the trouble brewing in America's manufacturing sector, much of it caused by the trade war. Early US tariffs fell largely on intermediate inputs—the parts and supplies American manufacturers use to feed domestic production. For some of these products, suppliers don't exist outside of China. With tariff rates on these goods now at 25 percent, American factories are feeling the pinch. Compounding the pain is a general slowdown in the global economy, increasing the difficulty US companies face in maintaining and expanding export sales.

America's factory activity has contracted in each of the past four months. Respondents to the influential Institute for Supply Management's Business Survey cite ongoing economic uncertainty and confusion over the US-China trade relations as reasons for the slowdown. And despite compensatory payments of $23 billion over the past two years, American farm states continue to suffer from the trade war.

A ceasefire in the trade war will bring much needed relief to America's factories and farms. Because renewed agricultural purchases by China have been declared a "must-have" by American negotiators, a "Phase One" deal will begin the process of restoring health to American farmlands. A rollback in existing tariffs will also bring relief to American manufacturing exporters.

And, most importantly, a ceasefire now raises the likelihood that the two sides can find lasting solutions to the problems identified in the US investigation of China's unfair practices related to technology transfer, intellectual property, and innovation.

Some see the postponement or rollback of tariffs as hurting US leverage for second and third phase discussions when even thornier issues, such as industrial subsidies, are likely to be tackled. Such criticisms ignore the obvious—we can only get to those talks if we reach a "Phase One" deal. Reaching that deal requires an end to escalation.

The economic and political benefits of de-escalation in the trade war have become readily apparent. A rollback of tariffs and cancellation of new levies, especially if followed by a Phase Two deal that tackles the difficult issues of American access to Chinese markets and trade-distorting industrial subsidies by the Chinese government, makes sense for the US economy and for the president. The time has come to negotiate better terms for American companies and workers.

More From: 

Mary E. Lovely Senior Research Staff

More on This Topic

Trade and Investment Policy Watch

Chad P. Bown (PIIE)

January 21, 2020
Trade and Investment Policy Watch
January 16, 2020
Trade and Investment Policy Watch
January 16, 2020