Policy Update 094

# How Tariffs Affect China's Exports

Willem THORBECKE
Senior Fellow, RIETI

Donald Trump launched a trade war with China. On 6 July 2018 he placed 25% tariffs on $34 billion of imports from China and on 23 August 2018 he placed 25% tariffs on an additional$16 billion of imports. On 24 September 2019 he added 10% tariffs on $200 billion of imports and in 2019 and 2020 added tariffs on an additional$300 billion of imports. Chad Bown and Melina Kolb provided a detailed timeline of the trade war (https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide). President Biden has left the tariffs in place.

How do tariffs affect China's exports? Figure 1 shows China's exports to the U.S. The figure only extends to 2019 to avoid the impact of the Covid-19 pandemic on exports. The figure shows that China's exports to the U.S. fell by almost \$90 billion in 2019, after trending upwards before that. This suggests that tariffs reduced imports from China.

Benassy-Queré et al. (2021) investigated quantitatively how tariffs affect bilateral trade flows between 110 countries at the Harmonized System (HS) six-digit level (http://www.cepii.fr/PDF_PUB/wp/2018/wp2018-08.pdf). They reported that a 10 percentage point tariff increase reduces exports by 14 percent and that a 10 percent exchange rate appreciation reduces exports by 5 percent. In a recent paper (Thorbecke, Chen, and Salike, 2021), we used Benassy-Queré et al.'s methodology to investigate how tariffs affect China's exports (https://www.rieti.go.jp/jp/publications/dp/20e011.pdf). We found that a 10 percentage point tariff increase reduces China's exports by 25 percent and a 10 percent renminbi appreciation reduces exports by 9.4 percent (Note 1). The evidence thus indicates that tariff increases are 2.7 times more powerful than exchange rate appreciations in deterring exports (Note 2).

Bilateral tariff elasticity estimates may be larger than multilateral tariff elasticity estimates because countries can substitute to imports from other countries. For instance, a tariff on machinery exported from China to the U.S. may cause importers to switch to German machinery. However, by switching the U.S. importer also incurs higher costs. The fact that 3,500 U.S. companies have filed lawsuits challenging the China tariffs, including Disney, Ford, and Coca-Cola, suggests that higher costs burden U.S. firms (see Williams, 2021).

The results in our paper also indicate that several sectors, including televisions, computers, and iron and steel have tariff elasticities greater than 3. This implies that a 10 percentage point increase in tariffs on these items reduces exports by more than 30 percent. Around the beginning of the 21st century, television manufacturers transitioned from analogue to digital technology. As Chang (2008) noted, under analogue production the technological advantage of a frontier producer such as Sony can be unsurmountable. On the other hand, under digital production any producer can purchase modules and assemble them to construct a television. Televisions have thus become commoditized and tariffs that increase the cost of supplying them trigger large export losses. The same is true of computers, with the Bureau of Labor Statistics import price index for computers (Harmonized System code 8471) falling logarithmically by more than 100 percent between 2000 and 2020 (https://www.bls.gov/web/ximpim/harmimp.htm). Computer makers thus have little pricing power and are forced to cut exports when tariffs raise costs.

The high elasticities for steel arise because steel is manufactured in almost 100 countries (Note 3). Domestically supplied steel can thus replace imported steel when tariffs rise. Excess capacity also makes it difficult to maintain price differentials on steel produced in different areas. Supply flows can shift rapidly in response to relative price changes arising from tariffs and other factors. Thus steel exports are especially sensitive to tariffs.

Steel exports from China to the world are also subject to many trade remedy duties arising from antidumping, countervailing duty, and safeguard actions. This indicates that the U.S. and other countries want to limit Chinese steel imports. Interestingly, Chinese President Xi also wants to limit Chinese steel production because of the severe pollution that the industry causes in the Beijing-Tianjin-Hebei region. Rather than using a confrontational approach such as imposing tariffs, the U.S. and other nations could negotiate with China to reduce its steel production.

The implication of the results reported here is that tariffs are powerful instruments. They impact not only Chinese exporters but also U.S. retailers, automakers, and other companies relying on Chinese imports. Tariffs disrupt supply chains. In addition they raise costs to U.S. firms at a time when businesses are warning the Federal Reserve of intense cost increases that they will pass on to consumers (https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20210602.pdf). It is important that grownups in both countries handle the U.S.–China trade war rather than politicians seeking to foment conflict.

This article first appeared on Econbrowser on June 8, 2021. Reproduced with permission.

Footnote(s)
1. ^ The exchange rate elasticity is similar to those reported by Cheung et al. (2012) (“Are Chinese trade flows different?”).
2. ^ The disruption to trade caused by tariffs is multiplied by the uncertainty that accompanies trade wars and protectionism. Bloom (2009) reported that uncertainty hinders investment. Investing in physical capital and in research and development is crucial for the electronics industry, given its short product cycles and volatile consumer demand.
3. ^ I am indebted to Anthony de Carvalho for the ideas in this paragraph. He is not responsible, however, for any errors.
Reference(s)
• Bénassy-Quéré A, M. Bussière, and P. Wibaux, 2021, "Trade and currency weapons," Review of International Economics, forthcoming. DOI: 10.1111/roie.12517.
• Chang, S., 2008. Sony vs Samsung: The Inside Story of the Electronics Giants’ Battle for Global Supremacy, John Wiley & Sons, Hoboken, NJ.
• Cheung, Y. W., M. Chinn and X. Qian, 2012, "Are Chinese trade flows Different?" Journal of International Money and Finance, Vol. 31, No. 8, 2127–46.
• Thorbecke, W., C. Chen and N. Salike, 2021, "China's Exports in a Protectionist World" RIETI Discussion Paper No. 20-E-011, Research Institute of Economy, Trade, and Industry, Tokyo. Available at: https://www.rieti.go.jp/jp/publications/dp/20e011.pdf

June 14, 2021

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