The Trump trade-war with China will be more costly than most forecasters predict
By Theodore H. Moran |
China Watch |
Updated: 2018-07-09 14:57
Theodore H. Moran
The Trump trade-war with China will be more costly -- and more damaging -- than even the best forecasters predict. The employment impact in the United States, moreover, is almost surely to be net-negative; that is, more jobs will be destroyed than will be created.
Why are the consequences likely to be so dire?
The reason is because old-fashioned trade wars through the use of tariffs do not correspond to the contemporary world of globalized supply chains.
Supply chains consist of production facilities that produce customized goods and services -- customized inputs of hardware and software -- to factories across borders. From 60 to 70 percent of these trade flows consist of intermediates which are inputs to other stages of the production process, depending upon the industry. The largest internal flows of hardware and software take place in computers, semiconductors, and electronics in general, but such internal flows are also significant in the automotive sector, in industrial products, and in medical devices.
These customized inputs cannot be readily shifted back to the home country, like the United States, as might have been the case with the imposition of tariffs 50 years ago. The transfer of production capability back to the home country at the margin is not zero, but it will be small.
Instead, most of these customized inputs must continue to be exported despite the tariffs, leading to higher cost inputs in the US. This makes the firms less competitive, and will reduce job creation, not expand job creation, in the US.
The United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization estimate that 80 percent of all trade today takes place within multi-national corporations (MNC) or within networks orchestrated by their parent companies. These MNC activities pay higher wages and benefits, produce more value-added, generate more exports, and involve higher levels of R&D than average firm activities. Thus the setback to MNCs and their supply chains will be particularly costly to economic growth and welfare.
The leading forecasters in the US are not unaware of this supply-chain phenomenon, of course, but the standard trade models that they use for their forecasts do not take this into account.
In the end, this Trump trade-war using tariffs is not only going to reduce global trade, but also result in net job-loss in the US. The magnitude of these damages will be larger than expected.
Theodore H. Moran is a nonresident senior fellow at Peterson Institute for International Economics. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
Theodore H. Moran
The Trump trade-war with China will be more costly -- and more damaging -- than even the best forecasters predict. The employment impact in the United States, moreover, is almost surely to be net-negative; that is, more jobs will be destroyed than will be created.
Why are the consequences likely to be so dire?
The reason is because old-fashioned trade wars through the use of tariffs do not correspond to the contemporary world of globalized supply chains.
Supply chains consist of production facilities that produce customized goods and services -- customized inputs of hardware and software -- to factories across borders. From 60 to 70 percent of these trade flows consist of intermediates which are inputs to other stages of the production process, depending upon the industry. The largest internal flows of hardware and software take place in computers, semiconductors, and electronics in general, but such internal flows are also significant in the automotive sector, in industrial products, and in medical devices.
These customized inputs cannot be readily shifted back to the home country, like the United States, as might have been the case with the imposition of tariffs 50 years ago. The transfer of production capability back to the home country at the margin is not zero, but it will be small.
Instead, most of these customized inputs must continue to be exported despite the tariffs, leading to higher cost inputs in the US. This makes the firms less competitive, and will reduce job creation, not expand job creation, in the US.
The United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization estimate that 80 percent of all trade today takes place within multi-national corporations (MNC) or within networks orchestrated by their parent companies. These MNC activities pay higher wages and benefits, produce more value-added, generate more exports, and involve higher levels of R&D than average firm activities. Thus the setback to MNCs and their supply chains will be particularly costly to economic growth and welfare.
The leading forecasters in the US are not unaware of this supply-chain phenomenon, of course, but the standard trade models that they use for their forecasts do not take this into account.
In the end, this Trump trade-war using tariffs is not only going to reduce global trade, but also result in net job-loss in the US. The magnitude of these damages will be larger than expected.
Theodore H. Moran is a nonresident senior fellow at Peterson Institute for International Economics. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
