U.S. right to push for better trade deal with China: Should be wary of consequences of trade wars

businessThe U.S. is right to push for a better trade deal with China, but escalating the dispute with retaliatory tariffs is not the best strategy, a Virginia Tech professor says, as the Trump administration prepares another round of tariffs on Chinese goods.

We should be persistent in our demands that China reduce their tariffs and remove their non-tariff regulatory trade barriers on imports,” said finance professor Raman Kumar.  “We have to change the current scenario – lose for U.S. and win for China in some instances – to a win-win scenario for both countries. We should not try to change it to a win for the U.S and lose for China – because their retaliatory tariffs will turn that into a lose-lose scenario for both countries.”

Kumar said the U.S. should “apply coordinated pressure on China” using a variety of tactics, including:  building a strong and irrefutable case demonstrating how their non-tariff regulatory trade barriers are hurting U.S. exports to China, leveraging the World Trade Organization; applying coordinated pressure on China with the help of our allies; and using the threat of higher tariffs as a last resort.

Kumar on how U.S. consumers will be impacted by the trade dispute with China 

“Most of the goods subject to the increased tariffs by the U.S. that went into effect on July 6, 2018 are not consumer goods, but rather intermediary goods such as semiconductors, and industrial goods and medical devices that are used in the manufacture or distribution of consumer goods and services. Consequently, the immediate impact of the trade war on U.S. consumers will be small. However, the longer-term indirect impact would be to increase the prices for consumers in U.S., as companies that buy such equipment and machinery from China pass on their higher costs to the consumers. This price increase for consumers would be greater if additional retaliatory tariffs, currently under consideration, are introduced on additional products, and, even more so, if the additional tariffs are introduced on consumer goods.”

Kumar on the short-term impact on the U.S. economy 

“The short-term impact of the tariffs by the U.S. will be small on the domestic economy and may not be noticeable, given the current strength of the economy. However, the short-term negative impact of the retaliatory tariffs by China on U.S. exports will be greater and noticeable for the producers and distributors of the agricultural, meat, and dairy products subject to these tariffs. These tariffs are likely to weaken the demand and reduce the prices for these products, resulting in losses and potentially bankruptcies for small farmers producing and exporting these products.”

Kumar on the long-term impact  

“Negative impacts are likely to be relatively small for the U.S. economy if the trade war is contained at the current levels with no additional tariffs from either side. However, the long-term costs could become significantly higher and severe if the trade war continues to escalate with tit-for-tat additional rounds of retaliatory tariffs.”

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