In a recent interview on CBS’s “Face the Nation,” Neel Kashkari, Minneapolis Federal Reserve President, warned about the potential for long-term inflation if President-elect Donald Trump, implements his proposed 10-20% tariffs on imports from all countries, with a higher 60% tariff targeting imports from China. An analysis of the impact of the higher tariffs imposed during the first Trump Administration may help shed light on the impact from further tariff increases.
During 2018 and 2019, the U.S. imposed five rounds of tariff increases, ranging from 10% to 25%, on about $350 billion in annual imports from China. More than 10,000 types of goods were subject to these tariff increases. Each round of tariff increases by the U.S. triggered a counter-tariff response from China that impacted U.S. exports to that country.
The signing of the U.S.-China Phase One Agreement in December 2019 resulted in a de-escalation of the trade war, but not its end. High tariffs remain on both sides. As of January 2021, the average U.S. tariff on imports from China stood at 19.3%, and the average tariff imposed by China on U.S. exports was 20.7%, both of which were higher than their respective pre-trade war rates at 3.1% and 8.0%, according to a study by researchers from the Peterson Institute for International Economics. Not much has changed since then.
In a recent research paper investigating the impacts of the U.S.-China trade war on ocean and air shipments, my co-authors and I found that average trade costs, including tariff and shipping costs, on U.S. imports from China, increased from 11% of the value of goods in 2016 to 30% in 2021. These increased costs contributed to a reduction in U.S. imports from China. We estimate imports from China were 35% lower in 2021 than they would have been if tariff rates had remained at the 2016 level. As a result, China’s share of U.S. imports declined from 21% to 14% between 2016 and 2023, indicating a reduced reliance on Chinese goods by the U.S.
In contrast, on the export side, despite the higher tariffs on U.S. goods, U.S. exports to China increased from $116 billion to $148 billion between 2016 and 2023. China’s share of U.S. exports only declined marginally from 8% of total exports to 7.3%. Thus, the decoupling of the U.S.-China trade relationship seems to have impacted U.S. imports from China more than its exports to China.
While the U.S.-China trade war was successful at reducing U.S. imports from China, these imports were largely replaced by imports from other countries. Between 2016 and 2023, the U.S. goods trade deficit with the rest of the world (ROW) increased by $382 billion. It has been widely reported that many companies moved their supply chains out of China to other low-cost countries, or shipped their Chinese-produced goods through third countries to avoid the higher Chinese tariffs. Consequently, it is not clear whether U.S. producers have gained from the trade war.
In addition to having an impact on goods trade, it is notable that tensions between the U.S. and China also impacted the trade in services between two countries, an area where the U.S. has traditionally run a strong surplus. From 2016 to 2023, the U.S. service trade surplus with China decreased by $10 billion. Much of the decrease can be attributed to a decline in Chinese travel to the U.S.
Finally, it should be noted that trade tensions between China and the U.S. put at risk the substantial investments U.S. companies have in their Chinese operations. In 2016, U.S. majority-owned affiliates in China had sales totaling $346 billion. By 2022, the sales of these majority-owned U.S. affiliates increased by 42% to $491 billion. At the same time, Chinese-owned U.S. operations increased their sales by 126% from $36 billion in 2016 to $79 billion in 2022. The further escalation of U.S.-China trade tensions could trigger economic repercussions that could greatly impede the operations of these cross-border firms, with the greater impact on U.S.-owned operations.
In summary, the trade war initiated during the first Trump Administration had the intended result of reducing trade with China. But this trade seemed to migrate to other countries rather than back to the United States. Moreover, the tariffs increased trade costs resulting in higher prices for U.S. importers, potentially contributing to U.S. inflation. The escalation of the trade war between the U.S. and China is not inevitable, and policymakers on both sides should reflect on the consequences of the past trade war before deciding on future policies.
Li Zou is a professor of marketing and supply chain management at Embry-Riddle in Daytona Beach.