The trade war has begun. This week China announced retaliatory measures in response to President Trumps 25% tariffs imposed on $50bn worth of imports from China. According to the Chinese Ministry of Commerce the tariffs are proportionate to the US measures, targeting 106 US products worth $50bn. The measures are no surprise, but what has caught some by surprise is the inclusion of soybeans on the list of targeted imports. US exports of soybeans was worth $12bn in 2016, so the inclusion makes political sense. But China wills struggle to replace US supplies, as it already gobbles up 60% of global soybean supply to feed a massive livestock population, including 400 million pigs. There simply isn’t enough soybeans in the world to replace the US supply. World market prices will rise as demand for non-US soybeans increases and still Chinese farmers will have to rely on US imports, coughing up tariffs on top of a higher market price. The policy will directly impact living costs in China. Chinese are amongst the worlds top consumers of pork and by far the largest producers.
None of these tariffs have been enacted yet, but with Trump threatening an additional USD 100bn worth of tariffs in response to China’s move, a quick de-escalation seems unlikely. Time will tell if the parties can come to an agreement and avoid a full-blown trade war.
The brewing US-China trade dispute is a textbook example of how tariffs work to undermine living standards by restricting free trade. It illustrates that by responding to misguided US policy by retaliatory measures, China is directly hurting the living standards of its own population. If the Trump administration insists on making life in the US more expensive by introducing tariffs, he should be left to do so without forcing others to do the same.
Preferably, China should respond to the foolishness of Trump’s threats by liberalizing its own markets, cutting subsidies and tariffs. This would serve the long-term interest of the domestic economy as production would reallocate in accordance with real costs of production – and it would be a gesture that would address President Trump’s unwarranted worry about bilateral trade deficits and facilitate a rethink of his counterproductive policy. This would be a win for Trump, but equally it would be a win for the Chinese domestic population. It would act to improve, not hurt Chinese living standards. Surely that should be the aim of any Chinese trade policy.