The True Cost of Tariffs

Gregor Moodie

Five months in and the trade war between the United States and China has shown no signs of abating as of late, with the White House announcing a new round of tariffs that took effect at the end of August. The steep 25% tariffs are likely to prove unpopular, and the Trump administration is already facing domestic pressure from business leaders who claim the raised cost will simply be passed on to American consumers. Beijing also reacted frostily, threatening reciprocal action. In the context of what appears to be a game of self-flagellation, this article will explore whether this trade war runs deeper than economics, and discuss possible outcomes to the ongoing stalemate.

What’s it all about?

Long-simmering trade tensions between the two states boiled over in an all-out trade war in April 2018. The Trump administration fired the first shot, levying tariffs on Chinese goods. This move acted upon Trump’s long-held grumblings over China’s ‘unfair’ trade surplus with the United States and his protectionist ‘America First’ policy in equal parts. Shortly afterwards, Beijing denounced the belligerence and irrationality of the US tariffs and, in July, imposed strategic countermeasures. Since then, both sides have been engaged in a stand-off, threatening further tariffs while diplomats scramble behind the curtain to negotiate more equitable trading terms. Trump’s capricious nature and the seeming inability of his advisors to curb his Twitter announcements have so far scuppered the chances of a fresh agreement, and with it, an end to the trade war.

More than meets the eye

The US tariffs have been roundly met with disapproval, both internationally and domestically. Economists, politicians and business leaders alike have made it abundantly clear they do not support a trade war. Some have highlighted just how misguided the tariffs are, damaging foreign (including American) investors in China, rather than Chinese companies. Others, including a senior IMF researcher, have pointed to a flawed economic basis for the tariffs. So why then does the Trump administration push on bullishly with potentially implosive measures? Perhaps it is because China has more to lose than dollars.

Under pressure

Although China seems to be weathering the trade war economically, rare rumblings of discontent are being reported. Criticism appears to be being levelled at leading figures in the China Dream strategy, most notably Wang Huning, a close aide and advisor to President Xi.The inference is that perhaps China has been too assertive in portraying itself as a global power, with this trade war and, potentially, others like it, being the price to pay.

As Washington ramps up the pressure, President Xi’s woes look set to increase. Despite wielding total control of the one party state, the Chinese Communist Party maintains legitimacy based on the precarious premise that they alone can make China wealthy and powerful, a message they have been cultivating since coming to power. Therein lies the rub, for should Beijing prove unable to continue to contain the effects of this trade war and it affects growth and, in particular, employment, then the deal they’ve struck with the Chinese people could be off.

The United States recognises this weakness. Their tariffs have been targeting two of China’s major sectors: agriculture and manufacturing. Beijing has so far managed to stave off some of the effects of the trade war through cash subsidies and by encouraging the purchase of Chinese goods, but government subsidies are neither an effective nor a long-term solution. If the US – China trade war escalates, Beijing will find it increasingly difficult to plug the hole left by US tariffs, which could lead to job losses in these crucial sectors.

To add to this headache, Beijing is not best placed at this time to effectively manage a spiralling trade war. Xi’s signature Belt and Road Initiative continues to grow with voracious appetite, converting billions of dollars’ worth of Chinese revenue into tarmac and concrete. This global power projection has earned China few friends and, coupled with their increasing assertiveness in contested territories and waters, has soured regional relationships even further. Engaged in an escalating trade war with their single biggest customer, China will need all the friends it can get in order to keep the initiative on track.

With pressure mounting on all sides, Beijing is feeling the heat. Government censors have been busy tightening the screws, removing even the most casual criticisms of President Xi or government policy. WeChat users have been sternly warned not to discuss anything that might be deemed unnationalistic, with some even being banned for touching upon political. The government’s banning of the new children’s film Christopher Robinover repeated but seemingly inoffensive comparisons between President Xi and Winnie the Pooh betrays just how sensitive they are feeling. Occasionally, however, when the screws are too tight, cracks begin to appear.

What’s to come?

The trade war has certainly taken its toll. Xi’s position looks, for the first time, slightly weakened. And for an individual at the helm of the world’s most populous country and a growing superpower, slightly weakened is critical. China is currently spinning plates with a multiplicity of domestic and international grievances; it’s a balancing act which threatens to tumble at any time. In this war, neither side can afford to back down. From beyond an economic perspective, it seems that China has the most to lose if the trade war continues, and President Xi appearing to lose face would be a major setback in China’s attempts to promote itself as a global player. At this stage, only time will tell, but the true cost of these tariffs could be China having to watch its dream become a nightmare.

Gregor Moodie is in his final year at the University of Glasgow studying Classical Civilisations, with a focus on Ancient Roman religious festivals, cults and folklore. Upon graduating he hopes to pursue a career in international relations.

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