Reasons arising to imbalanced trade are too many, complex, intertwined and perplexing. No economists, academics, politicians, financial commentators and analysts can explain fully and satisfactory. Data and trade are often deliberately misrepresented to confuse or mislead the masses for political motives.
I want to use a layman approach to illustrate the impact of trade war which yield no winner. All sides lose in trade war. It is like all sides taking turns to slash others until the weakest one drops dead. Most international trades are dealt on FOB (Free On Board – the buyer engages freight forwarder to collect the goods at port of origin) or CFR (Cost & Freight – the seller ships the goods to the destination port at his cost).
Most exporters do not like Incoterms DDP (Delivered Duty Paid – where the sellers delivered the goods to the destination port, clear the inbound customs with duty and tax fully paid). They do not want to take the risk on the uncertain customs duty and tax. Even for those DDP deals, the sellers have added in the freight cost, known customs duty and tax to the product cost.
Henceforth, the tax tariff is paid by the importers and eventually pass on to the end users or consumers buying the products and commodities. No sellers will agree to pay the inbound tariffs at the buyer’s country unless the cost of product has been adjusted accordingly.
Then why do countries impose tariffs? Usually it is a measure used to deter the consumers and manufacturers from buying particular products from a certain country either to protect its similar domestic products or as a punitive measure against an unfriendly nation.
Understanding these trade terms, the tariffs that Trump is imposing are being paid by US companies and consumers. Thus, the inflation will go up in US and cost of products is going to rise. The cost competitiveness of US exported products is diminished. A classic example is the predicament that Element Electronics is encountering (https://www.washingtonexaminer.com/news/trumps-flip-flop-on-tariffs-burns-company-that-backed-his-trade-war).
Besides industrial products, the bulk of the Chinese imports to America is merchandized goods which will increase the household expenditures with the increased tariffs. Unfortunately, US cannot find an immediate alternate supply of these goods from another country. Due to the vast and efficient supply chain in making the products, China is offering very competitive price for its products; carrying its trademark “Factory of the World” to its core competency.
On the other hand, the US goods that China is importing are commodities such as soybean, corn, almond, beef, pork, oil, natural gas and raw materials which China can easily buy from other countries. The costlier imported US cars will be replaced by cheaper other made. The industrial products are mainly used by the foreign companies operating in China. These companies are manufacturing products for China domestic market and their home countries. The additional cost of these industrial products will end up as higher cost to the home country when the companies export the final products home. There are some companies and factories gravely affected by the US tariffs. China is willing to sacrifice these companies instead of yielding to Trump’s demands. And with the vast reserves it has in its treasury, China is adamant to fight on with Trump on this trade war.
Therefore, if President Trump imposes tariffs to all Chinese imports, I believe most Americans will not agree to his moves. The impact is beginning to surface and widely reported by the mass media now.
We can see which side has more sever pain than the other!
Calipe Chong
Aug 10 2018
http://www.understandingchina.net