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International trade is at best complicated and worst convoluted and Trump’s calculation appears to be that China has more to lose and so will back down. He is wrong.
Headline statistics greatly overstate China’s economic vulnerability — and understate America’s. Focusing on trade in goods, as most observers do, U.S. imports from China last year totaled $506 billion, nearly four times its exports in the other direction ($131 billion). But the United States also sold $38 billion more in services to China than it bought in return, its biggest bilateral surplus. And whereas U.S. goods exports to China are mostly agricultural produce and finished products consisting of mostly American content and sold by U.S. firms, China’s exports to the United States are typically Chinese-assembled goods that contain many foreign parts and components — and are often American-branded to boot. A further 37% of U.S. imports from China consists of parts and components on which U.S.-based manufacturers rely. Let’s examine:
Take Apple’s iPhone. When iPhones are shipped from Chinese factories to the United States, the full import cost is attributed to China. Yet these phones include a Samsung display from South Korea, a Toshiba memory chip from Japan and many other foreign components. According to one estimate, assembly in China accounts for only 3-6% of the $370 manufacturing cost of an iPhone X. Since that smartphone retails for $999, the bulk of the value added is American: Apple’s margin and that of U.S. retailers.
Even a blanket U.S. tariff on all Chinese goods exports — iPhones and all — would be bearable for China. The Organization for Economic Co-operation and Development reckons that around a third of the content of U.S. imports from China is actually of foreign origin. So the Chinese value added of its exports to the United States is perhaps $329 billion — some 2.7% of China’s $12 trillion economy. So even if a blanket Trump tariff slashed China’s exports to the United States by 25%, the direct hit to GDP would be 0.7%. That would hurt. But it would still leave the Chinese economy growing at 6.1% a year. Imagine the consumer uproar if Trump slapped a tariff on iPhones!
The threat isn’t just to American-branded products that American consumers love. A trade war also poses a threat to U.S.-based manufacturers that rely on Chinese parts and components to be globally competitive. Trump’s $46 billion list already targets aircraft propellers, machine tools and other intermediate goods. Pushing up their costs would threaten manufacturing jobs in America’s heartland. And while those tariffs avoid consumer staples such as clothing and footwear, they will inflate the prices of some consumer goods, such as televisions and dishwashers.
In summation, the United States’ trade deficit with China — which is actually perhaps only $200 billion in value-added terms — scarcely gives it an advantage.