As promised, goods from China will cost Americans a lot more money starting today — and selling goods in China even tougher. A last-ditch effort to avoid the imposition of tariffs failed late yesterday, resulting in a broadened trade war between two of the top global economies. At least at the moment, there don’t seem to be too many off-ramps from this conflict:
The United States and China hurtled toward a defining moment in their four-decade-old relationship, with financial markets bracing for the outcome of unusually dramatic trade talks in Washington.
Negotiators met into the evening on Thursday but failed to avert an increase in U.S. tariffs on $200 billion in Chinese products that took effect at 12:01 a.m. Friday. The two sides have agreed to continue negotiations Friday.
Robert E. Lighthizer, the chief U.S. trade negotiator, and Treasury Secretary Steven Mnuchin “met with President Trump to discuss the ongoing trade negotiations with China. The Ambassador and Secretary then had a working dinner with Vice Premier Liu He, and agreed to continue discussions,” the White House said in a statement.
Technically, however, negotiators have a few more days before those tariffs take effect:
Because the higher tariffs apply only to goods that leave China on Friday — not shipments already approaching American shores — officials still have time to work out a last-minute solution.
China says they will take “countermeasures” when the changes do take place. Where will those hit? Most likely in the agricultural sector, for a couple of reasons. First, China has fewer target options because they ship a lot more to the US than they allow the US to export to China, but agriculture is one of those needs. China’s buying their soybeans elsewhere already, but they can cut off even more of those purchases, as the panel on NBC’s Today noted:
“The Chinese are threatening retaliation here. What might that retaliation look like?” –@craigmelvin asks about new tariffs
— TODAY (@TODAYshow) May 10, 2019
The second reason China will target agriculture is because that could do the most damage to Donald Trump, politically speaking. The ag sector is most predominant in the states Trump needs to carry in 2020; if the tariffs hit the local economies of the Midwest, it’s going to put one hell of a dent in Trump’s momentum. However, Trump pledged to use the tariff money to buy crops directly and send the food where it’s most needed:
That assumes that China continues to send products to the US, and that consumers buy them despite their higher prices. Let’s not lose sight of the fact that China won’t pay the tariffs — American consumers will pay the tariffs as the costs get passed along to the buyers. The higher prices will make other products more competitive against those produced in China, which means those sales will suffer.
In a way, this is similar to tax analysis, because tariffs are very much like taxes. Trump is using static tax analysis, which assumes that changes in policy do not create changes in incentives and resulting behavior. Dynamic tax analysis is trickier because it has to anticipate the changes in behavior and their impact, but it’s far more accurate as a predictive model for revenue. The numbers here are high enough that it might not matter, but we’re not likely to see the income Trump hails here after the competitive impact of tariffs get felt.
Talks are still continuing, however, likely with the focus on pushing China back to its original agreements in earlier rounds. Their attempt to redline those agreements has blown up in their faces, but at least now they have gotten a better measure of Trump. He’s not playing a short game with China in the way he might have with Canada and Mexico — looking for some minor modifications to trumpet as major initiatives. Trump wants significant changes to the way China does business with the US and seems willing to put an end to that business if necessary to achieve it. Perhaps that clarity will produce good-faith negotiations from Beijing.