Description
President-elect Donald Trump campaigned on plans to boost the US economy by sharply raising tariffs on US imports from China. Some members of Congress seek to pave the way for such action by stripping China of its status as a country with permanent normal trade relations (PNTR) with the United States (formerly known as most favored nation status). But our research finds that revoking China’s PNTR status would result in higher prices and lower economic output in the United States than otherwise, particularly in agriculture and manufacturing.
We reached these conclusions by using an economic model to generate a baseline forecast for GDP, inflation, and other variables in 24 countries and regions if China retains its PNTR status. Then, we used the model to project the effects of revoking China’s PNTR status, measured as deviations from the baseline forecasts. Our online dashboard provides a full set of results.
Revoking China’s PNTR status would cause a short-term decline in US real GDP relative to the baseline forecast, and the effects would be worse if China retaliates by imposing the same tariff changes on its imports from America. US agricultural output would be lower than otherwise because the dollar would appreciate, curbing the sector’s exports. Manufacturing output would suffer because of the sector’s dependence on China as a source of intermediate inputs for production. US makers of long-lasting durable goods would also be hit by an investment slowdown in both countries.
The higher tariffs permitted by revoking China’s PNTR status would cause inflation to rise by 0.4 percentage points by 2025 if China retaliates, as is likely. Inflation would moderate over time because the dollar would appreciate and the Federal Reserve would raise interest rates. But prices overall would remain higher than otherwise.
Ironically, the revocation would damage the US industrial sector and contribute to a wider US trade deficit—the opposite of what its supporters intend.
This PIIE Chart is adapted from Megan Hogan, Warwick McKibbin, and Marcus Noland’s Policy Brief, Economic implications of revoking China's permanent normal trade relations (PNTR) status.
