• One of the objectives of the new tariffs introduced by the US is to reduce its trade deficit, which stood at US$568.4bn in 2017, representing 2.9% of GDP.
  • However, while more costly imports are likely to reduce the quantity and value of shipments into the US, this doesn't necessarily mean the value of exports will remain unchanged.
Higher US tariffs will likely result in lower imports and lower exports

Higher US tariffs will likely result in lower imports and lower exports

The rise of US import tariffs and the subsequent escalating trade war will hit the cost of producing goods for export and make them less competitive, economists have warned.

Import tariffs are on the rise in the US, with new tariffs imposed in the last few months including 25% on steel imports, 25% on aluminium and 25% on US$50bn worth of goods from China. President Donald Trump has also threatened a further $200bn of tariffs on Chinese goods, with the East Asian country threatening to retaliate with its own duties.

One of the objectives of the new tariffs is to reduce the US trade deficit, which stood at $568.4bn in 2017, representing 2.9% of GDP. The fact the US imports far more than it exports is viewed by some as unfair, so the idea is to try to reduce the amount the nation imports from the rest of the world, economists at The Federal Reserve Bank of New York point out.

Yet while more costly imports are likely to reduce the quantity and value of shipments into the US, the economists argue that US exports will also fall – not only because of other countries' retaliatory tariffs on US exports, but also because the costs for US firms producing goods for export will rise and make US exports less competitive on the world market.

The end result, they say, is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.

They offer an example. China reduced its import tariffs when it joined the World Trade Organization (WTO) in December 2001. Although China had lowered its tariffs prior to that time, in 2000 they were still fairly high, averaging 15%.

By 2006, this average tariff rate had fallen by 40% to 9%. The growth rates of both China's exports and its imports increased by more than 25% on average per year in the following five years, compared with the five years prior to joining the WTO. 

"Focusing on China's exports to the US, our research paper 'How Did China's WTO Entry Affect US Prices?' shows that by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the US export market and compete with other firms," the economists explain.

"With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their US market shares. A large part of the market-share gains stemmed from new varieties of goods exported by Chinese firms entering the US export market."

The economists believe a rise in tariffs may lead to the opposite scenario, both for China and the US, and an overall fall in trade.

In a move aimed at avoiding such a situation, a Chinese delegation, led by vice-commerce minister Wang Shouwen, will visit the US before the end of the month in an effort to reach a resolution before an all-out trade war ensues.

However, Trump has urged China to bring a fairer deal to the bargaining table. He told a cabinet meeting last week: "They just are not able to give us an agreement that is acceptable, so we're not going to do any deal until we get one that's fair to our country."

The timing of the meeting will be critical given the next looming tariff date between the US and China is set for 23 August when each country will begin collecting 25% duties on US$16bn worth of imports.