TRUMP'S TRADE WAR | How the Détente Magnified the Pandemic Disaster

The extraordinary, unilateral China trade
barriers did not help the American worker.

Trump's trade war with China deeply damaged the U.S. retail sector, manufacturing and farming. But the related decline in global cooperation may be the more serious long-term effect. 

The détente delayed getting key information from China about the coronavirus. It therefore  increased the loss of life and lengthened the period we now face of a national economic shutdown. 

The story of the mistrust that the President sowed globally, with his unprecedented use of emergency powers to reduce trade, is well told by the Carnegie Endowment:

[T]he world’s leading economic power has furthered trade conflict by erecting barriers and imposing restrictions. The world now lacks a leader to represent the interests of both developing and developed economies in promoting prosperity.

The Lessons of Tariff History that Trump Never Learned

The 2019 U.S. tariff hikes hit U.S. retailers and apparel and other brands hard, even before the decimation caused by the coronavirus. Apparel and accessories in 2017 had the highest duties in the U.S. tariff schedule to begin with. The China tariff hikes raised them seven-fold. The Chinese Government retaliated, as expected, with high tariffs on U.S. farm exports. The U.S. taxpayer is now compensating farmers for the retaliation, because China is not importing as much as it did before the 2019 tariffs.

This is not the first time that the United States has experimented with high tariffs. Twice before it has happened. The results did not provide encouragement for any future president to go down this route.

1. Before the Civil War, tariffs were mainly revenue-raisers. An exception was the 1828 “Tariff of Abominations,” with protectionist rates as high as 45 percent. This tariff was not a success. The incumbent President, John Quincy Adams, lost the next election over this tariff, which pleased neither the South nor the North. (The story is told here in the House of Representatives official history.)
2. After the Crash of 1929, as the number of unemployed Americans tripled, President Hoover signed the protectionist Smoot-Hawley Tariff Act, over the opposition of more than 1,000 free-trade economists. This tariff was not a success. The economists’ fears about the tariff proved justified—during 1930-33, the number of unemployed tripled again, exacerbating the Great Depression. Global trade declined by two-thirds, precipitating a trans-Atlantic financial panic that paved the way for German dictatorship and World War II.  This lesson learned, in subsequent years from 1933 to 2016, U.S. trade policy sought stability and reciprocity—starting in 1948 through the General Agreement on Tariffs and Trade and since 1995 through the World Trade Organization.

The Unusual Nature of Trump’s Tariffs

Multilateral U.S. trade policy was upended soon after President Trump was inaugurated in 2017. In the election of 2016, candidate Donald Trump promised to bring back manufacturing jobs from China, and thereby won votes in some traditionally Democratic industrial states in the Mid-West. As President, he attempted to make good on his promises by imposing unilateral tariffs, and he even ordered brand executives to bring manufacturing jobs back to the United States. .

The new tariffs utilize three U.S. laws that empower the President under extraordinary circumstances to impose unilateral tariff increases: The Trade Expansion Act of 1962 (Section 232), the Trade Act of 1974 (Sections 201 and 301) and the International Emergency Economic Powers Act of 1977 (Section 1701). 

These special powers have rarely been invoked, and never in combination. Their recent use, according to the nonpartisan Peterson Institute of International Economics, introduces “escalation [of] risk significantly hampering trade and investment, and possibly the global economy.” Here are the five tariff moves and the laws cited as authority:

1. Solar Panel and Washing Machine Imports Injure US Industries, Section 201 (1974).

2. Steel and Aluminum as National Security Threats, Section 232 (1962).

3. Unfair Trade Practices for Technology, Intellectual Property, Section 301 (1974).

4. Autos as National Security Threat, Section 232 (1962).

5. Illegal Immigration from Mexico, Section 1701 (1977).

The China tariffs rely on Section 301, part of the law passed in 1974. The tariffs were imposed ostensibly to convince the Chinese Government to show greater respect for U.S.-owned technology and intellectual property rights. It is not clear what, if anything, has been achieved in pursuit of the ostensible goals. Instead, mutual communication has suffered, which has hurt the U.S. effort to prevent the spread of the coronavirus within our country.

American Consumers Are Paying the Tariffs

In 2017, apparel and clothing accessories accounted for $80.6 billion in imports, 3.5 percent of all imports. Of this, nearly $64 billion, or 79 percent, was subject to duty. Average tariffs on dutiable goods were 18.7 percent for knitted or crocheted clothing, and 15.8 percent for other items, both being the highest average rates out of 98 import categories. Nearly all of $25.5 billion imported footwear was subject to an average tariff of 11.9 percent.

In September 2019, the President raised American tariffs on foreign goods to their highest level since the 1960s, when tariff barriers were lowered to promote global cooperation and freer world trade. A new 15 percentage-point tariff surcharge took effect on clothing and many other products from China, raising average tariffs on Chinese imports to 21.2 percent, nearly seven times the level in effect when Mr. Trump became President.

Chinese manufacturers did not reduce their prices. They did not pay the tariffs. Importers pay tariffs when the goods land in U.S. ports. Some smaller U.S. retailers have been able to raise prices to cover the higher cost of Chinese goods, but most discount retailers and brands in a competitive marketplace do not immediately pass the tariff on to their price-conscious consumers. 

Instead, the tariffs affect their profit margins. So the recent new U.S. tariffs are paid by U.S. brands and retailers. See the following chart from the Peterson Institute for International Economics, where a better quality chart can be found as well as regularly updated information.

Farmers Are Paying in Reduced Exports

China, as expected, responded with retaliatory tariffs on U.S. exports to them. To offset the impact on U.S. farmers, the U.S. taxpayer provided $16 billion in compensatory farm subsidies. The bulk of this money is going to large farmers, with 80 percent of the farmers receiving less than $5,000. 

The economic impact of the tariffs has been to reduce foreign trade, increase prices to some consumers, and lower the profit margins of brands and retailers. Based on product-level data from large retailers, the tariffs’ impact on retail prices is mixed, suggesting that retail profit margins have fallen. However, U.S. exporters lowered their prices on goods subjected to foreign retaliatory tariffs compared with exports of non-targeted goods. 

Far from generating any new respect for U.S. intellectual property, the new tariffs are hurting both U.S. importers and exporters.

The Cost to the Brands

Apparel brand executives don’t like the tariffs, especially the lack of prior warning and the unilateral nature of the President’s negotiations, because it creates uncertainty among brand managers, retailers and executives. Each new tariff requires executive time to assess the probabilities, modify plans and generate alternative supply channels that comply with laws.

The American Apparel & Footwear Association (AAFA), which represents more than 300 companies and 1,000 name brands, supported the Administration’s addressing Chinese forced technology transfer and intellectual property theft. It noted that its industry employs nearly four million U.S. workers and contributes more than $400 billion in annual U.S. retail sales, and has a documented history of working to improve Chinese intellectual property rights enforcement. 

However, the AAFA opposes use of tariffs for negotiating to protect intellectual property, because they are especially burdensome for the apparel industry. They are a hidden tax on U.S. consumers, especially on the many consumer products that are included. They harm the U.S. manufacturing base by taxing the ingredients of what brands sell to consumers. They trigger retaliation by China. 

According to the AAFA, during 2017, the apparel industry paid 51 percent of all of America’s tariff receipts, even though it accounted for only 6 percent of U.S. imported goods. 

Annual tariff charges exceed the income taxes that many apparel companies pay. Higher tariffs on China pressure U.S. brands to abandon efficient and compliant supply chains they have developed. In 2017, China accounted for 71 percent of U.S. footwear imports as well as the previously mentioned 42 percent of U.S. apparel imports. To diversify sourcing takes time and imposes additional costs. Meanwhile, counterfeiting becomes more profitable because tariffs increase the spread between the bootleg price and the price of the legitimately sold product. The AAFA concludes: “[W]e do not believe continuing to tax Americans gives us leverage at the negotiating table with China, and it is past time that these misguided tariffs were removed.”

Apparel executives seeking to adjust to the US-China trade war can either raise prices, reduce profit margins or switch their sourcing or marketing. Raising prices in a competitive marketplace threatens a brand with loss of market share. The brands have absorbed most of the tariff rather than face a challenge to their market share. However, 25 percent tariffs challenge the profitability of even the highest-margin products. Margins in the fashion industry are competitive—the overall profit margin at Ralph Lauren is 10.4 percent, at Nike 9.8 percent and at Gap 7.9 percent.

Many companies are shifting sourcing, especially to other countries in Southeast Asia. Vietnam’s exports to the U.S. jumped 33 percent in the first six months of 2019, versus the same period in 2018. As already noted, reshoring to the United States is not an option for large-scale manufacturing because the skills and supply chains have largely disappeared over time. When the US Chamber of Commerce in China surveyed American companies there in May 2019, 40 percent of companies said they were considering moving production out of China, but of them, 25 percent said they were looking at Southeast Asia and 10 percent said Mexico–only 6 percent said they were considering reshoring. A few months later, however, in July 2019 (after more tariff increases), a different survey of large fashion companies showed 83 percent planning to move some production out of China.

To avoid paying the U.S. tariff on Chinese-made products, sales could be diverted to Europe, where the tariff is lower. But apparel competition in Europe is keen, so winning much market share there would be difficult. Products may just have to be deeply discounted and then probably discontinued.

Cost to U.S. Consumers

As retailers and brands adjust their supply chains to address the tariffs, the consumer will eventually pay for the tariffs with higher prices for clothing. As of May 2019, the cost to  consumers was estimated by the Federal Reserve Bank of New York at $831 per household per year. Incorporating more recent tariff increases, the Congressional Budget Office estimates in January 2020 that the tariffs have reduced average real household income in 2020 by $1,277.

How about the idea of reshoring manufacturing to the United States? Could the tariffs create a wall behind which U.S. apparel manufacturing could rebuild? That would at least provide a silver lining to the cloud. However, the reality is that the apparel industry is not in a good position to do this. Of clothing sold in the United States; only about 3 percent is made in the United States. The skills and supply chains are no longer in place.

In 2017, American consumers purchased $136.8 billion in apparel from abroad, while American apparel manufacturers exported only $10.5 billion, for an industry trade deficit of $126.3 billion. Though most apparel products are manufactured overseas, much of their value is created by U.S. branding and advertising, so that calculating a trade deficit requires measuring value added in each stags of the supply chain. By far the largest exporter to the United States in 2017 was China, with 43 percent of U.S. apparel imports. The four countries next in dollar value were Vietnam (13 percent), India (5 percent), Indonesia (5 percent) and Bangladesh (4 percent). Between 2017 and 2018 the share of apparel imports accounted for by China fell slightly, from 43.4 percent to 42.5 percent.

Overall, as mentioned, the Congressional Budget Office estimates that the tariffs reduce average real household income by $1,277 in 2020. The CBO also estimates that the tariffs reduce real GDP by 0.5 percent and increase consumer prices by 0.5 percent. Moody’s Analytics concludes recent tariffs have destroyed 304,000 U.S. jobs.

The Impact of Tariffs on New York City 

Since your blogger served for 13 years Chief Economist for three New York City Comptrollers, the impact of the tariffs on New York City is a matter of personal pain. 

The impact of the tariff can be measured by traffic into and from the Port Authority of NY& NJ, where most apparel imports to the region arrive. 

On the surface, New York's importing role was not affected. Total container imports to the Port Authority of NY&NJ were increasing in the first half of 2019 by 5 percent. The import declines of 5 percent each occurred in the two major West Coast container ports. The Port of NY&NJ thereby passed Long Beach as the second-largest U.S. container port, after Los Angeles, with 15.6 percent of imports vs. 15.3 percent in Long Beach. The top three ports together account for half the volume of all U.S. containerized imports.

However, data for the Port of NY&NJ show that imports from China were being replaced by other countries in East and Southeast Asia. The volume of containers imported to the Port of NY&NJ from Vietnam increased 30 percent in the first half of 2019 compared with the same period a year earlier. Imports from India and South Korea both increased more than 11 percent. The shift to the East Coast container ports suggests that more container ships are traveling west, with the sun.

During the first half of 2019, tariffs covered less than half the value of Chinese goods. By the end of August 2019, tariffs extended to virtually all goods from China and a few other countries. The Phase 1 agreement with China still covers 64.5 percent of Chinese goods.

The January 2020 Port Authority report—before the arrival of Covid-19—shows that for 2019 through November, container imports were 3.5 million Twenty-foot Equivalent Units (TEUs, so a forty-foot container would count as two TEUs), an increase of 3.7 percent over the same period in 2018. Container exports were 1.3 million TEUs, a decrease of 0.8 percent over the same period in 2018. So the high tariffs neither raised net exports nor lowered net imports.

Two Recommendations 

1. House Oversight Committee Questions. The House Oversight and Reform Committee could ask questions of the US Trade Representative or independent observers. The overall question is whether the China tariffs can be lowered, on a bilateral and multilateral basis, in return for reasonable concessions on intellectual property and a plan for mutual cooperation in other areas. Here are some possible questions:

• Intellectual Property and Other Unfair Trade Practices. To what extent has China been subsidizing technology and manufacturing, or exploiting copyrights and patents without permissions? What would level the playing field between the two countries? 
• Who Pays the Tariffs? Do not U.S. companies, the importers of record, actually pay the tariffs?  Is it therefore inaccurate and misleading to say these tariffs are paid by the Chinese or other foreign governments? What dangers and opportunities did or do tariff walls and supply shortages create? Have related consumer prices risen, and what is the outlook?
• Economic and Human Impact. Has the USTR or the U.S. Department of Commerce been tracking the negative impact that the tariffs are having on businesses across the country, especially manufacturers who rely on intermediate parts from China? What assessment of the long-term impact of tariffs has the USTR done? What evidence is there of any longer-term benefits? What are the short-term costs? In the wake of the hostile environment created by the tariffs, can we conclude that human lives in the United States were lost because of delays in communication from China of the severity and nature of the Covid-19 disease?
• Communication and Cooperation. How is the Administration working jointly with our allies and trading partners to confront shared challenges with China? What is the net effect of President Trump's withdrawal of compliance with World Trade Organization guidelines? What is the net effect of President Trump's withdrawal of support for the World Health Organization? What will it take to bring the United States back to the table? Could the United States be doing more?

2. Sponsor or Cosponsor Law to Curtail President’s Tariff Authority. Pass a bill to curtail the President’s tariff-making powers, such as one sponsored by Joint Economic Committee Chairman Mike Lee, S.1284 (Global Trade and Accountability Act of 2019), to end unilateral Presidential tariff actions except for national security reasons (subject to a 90-day limit) that must be approved by the Department of Defense. In March 2018 Senator Lee advised the president not to start a trade war.  

Three Democratic Representatives have sponsored tariff bills:

Ron Kind (Wisc.), two bills, H.R. 1452 and H.R. 1008.

Stephanie Murphy (Fla.), H.R. 3477.

Joe Cunningham (S.C.), H.R. 3673

The table below shows some differences among the six anti-tariff bills before the Congress.

Bill Number		Sponsors		Cosponsors		More Oversight?	Retro- active?
House	Senate	House	Senate	House	Senate
H.R.723	S.1284	Davidson R	Lee	10Rep, 1Ind	4Rep	Yes	No
H.R.1452	S.577	Kind D	Lankford	11Dem, 9R	5Dem, 1R	No	Yes
H.R.3477	S.899	Murphy D	Kaine	5Dem	3D	Yes	No
H.R.1008	S.365	Kind D	Portman	7Dem, 4R	3D, 6R	Yes	Yes
H.R.3673	N.A.	Cunningham R	N.A.	None	N.A.	Yes	Yes
H.R.940	S.287	Gallagher D	Toomey	14D, 12R, 1I	8D, 9R	Yes	Yes

Source: Based on publicly available website data as of the end of 2019.