Our Huge Trade Deficit with China Does NOT Give Us the Upper Hand in Tax (Tariff) War
Photograph Source: Tia Dufour, White House – Public Domain
Many reporters and commentators have claimed the United States has the upper hand in a trade war with China because we have a large trade deficit with China. We import almost $440 billion a year in goods from China, while they import only a bit over $140 billion from us. That means we can impose tariffs on far more Chinese goods than they can on US-made goods.
While that claim is true, it loses sight of what tariffs are. Tariffs are a tax on goods we import. If we do the simple arithmetic on Trump’s 104 percent tariff on China’s goods, he is imposing a $460 billion annual tax on people in the United States. (It would be far less because imports from China will plummet, but we can use this as a first approximation.)
A tax increase of this size, more than 1.5 percent of GDP or $3,700 per household, would ordinarily have people screaming bloody murder. Republicans went crazy over tax increases by Clinton, Obama, and Biden that were far smaller.
It’s true that China cannot tax as many imports from the US, but it is not as though the taxes on our imports from China are costless to us. They will mean higher prices and a lower standard of living for people in the United States.
We just had an election in which inflation or “high prices” were the central issue. If anyone thinks that high prices from Trump tariffs are not a big problem for people here, then the media must have lied to us about the importance of high prices in the election.
It’s also worth mentioning one other potential weapon China has at its disposal. Companies in the United States make an enormous amount of money off their intellectual property (IP): the patent and copyright monopolies they have on prescription drugs and other products and the copyrights they hold on movies, music, and software.
We have often claimed that China does not adequately enforce our IP domestically. While there surely is some difference in their level of enforcement and ours, for the most part our companies do get money from China for their IP claims.
However, China could go full throttle in the opposite direction. It could make a point of ignoring US patents and copyrights. And it could do this not just for its domestic market but also for export, making cheap versions of Pfizer’s blockbuster drugs available to the whole world, along with free copies of Microsoft software and Disney movies. That would make the US, or at least US corporations, big losers in a trade war.
This originally appeared on Dean Baker’s Beat the Press blog.
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