7 Reasons Why Trade Tariffs to China Are Ineffective, Harmful to US Firms

By Linda H. Zhang, Founder and CEO, Purview Investments

After the breakdown of the eleventh round the US-China trade negotiation, the U.S. administration raised trade tariff to 40% of Chinese imports from 10% to 25%, threatening to impose tariffs on the rest of the $539 billion imports from China each year. China just announced its counter measurements, in smaller scale. The U.S. stock market has been devastated with anxiety.

As a long-time observer and investor in both the U.S. and Chinese markets, the U.S. trade tariffs are ill-advised and are based on major flawed conceptions. Let’s make clarifications.

  1. Trade Tariff is paid by American importing firms, passed onto American businesses and consumers.  It is NOT paid by the Chinese.  Trade tariff is simply a tax levy on American business and American consumers! Imposing trade tariff is like pointing a gun to one’s foot.  It’s just not a credible threat.
  2. Trade statistics distorts reality.  A significant portion of the import from China comes from US firms re-exporting goods back to the US, e.g. iPhones. Apple and many US firms that produce in China and re-export back to the U.S. would be subject to high US tariffs, if the administration goes ahead with its threat about tariffs on all Chinese imports.
  3. Trade war is not win-lose situation, it’s a lose-lose for both countries, and all countries (Japan, Asian, European), who are parts of the global supply chain.
  4. US companies have been major beneficiaries of the established global supply chains built in last two-decades, claiming the largest portion of profit along this supply chain. US firms and their stocks would become a major casualty from the disrupted global supply chain.
  5. Heavy tariffs are not likely to displace China as the center of the global manufacturing supply chain, as there is simply not another single country that has comparable infrastructure, logistics, skilled labor, capital, technology and the size of the local market.
  6. China no longer relies on export as its key economic driver. $539 billion annual export to the US is a drop in the bucket of the second largest global economy. The damage to China was way over-estimated by the administration and its hawkish advisers.
  7. Trade wars poison the relationship, the trust and potentially the brands of American products globally.  iPhone sales dropped by over 20% in Q4 in China, yet the leading brands expanded their sales. When China has already become the largest overseas market for many US companies, these firms might become a major casualty of the relentless US trade war against China.

In summary, effective trade negotiations and progress can only be based on reality, not misconceptions. The way forward is to take what the other side already offered, access to financial market, majority foreign owned asset management firms, increased enforcement of IP, among others. Further more, offer incentives to the other side to close a deal. A deal means both sides gain.