The standard arguments against increasing tariffs on China often revolve around fears that:
- Inflation is due to increased costs of imported goods.
- Retaliatory tariffs from China could impact our exports.
However, there’s a silver lining in the structure of U.S. exports to China.
China exports far more to the U.S. than we export to them, leading to a significant trade deficit. While China floods our markets with manufactured products, its primary imports from us are in categories that directly affect consumers:
- Agriculture makes up 30% of U.S. household spending on food.
- Energy accounts for 10% of household expenses.
(The other major category of household spending – 30% – that has hammered consumers in recent years is housing, but that is a supply problem caused by a lack of home building.)
Additionally, China imports chemicals, high-tech circuits and aerospace products from the U.S., which I’ll address later, as any tariffs China places on these categories might not align with its strategic goals.
Here’s the key point: China does not produce sufficient food for its population, while the U.S. has a surplus, producing 30% more food than it consumes. Similarly, the U.S. is a net energy exporter, whereas China relies heavily on imports to fuel its populace and economy.
Should China retaliate with tariffs on our agricultural and energy exports, it would increase the price for Chinese consumers and industries. Consequently, demand for these U.S. products in China would likely decrease as they seek alternatives that are not burdened by tariffs.
This scenario could increase the domestic availability of these products in the U.S., potentially resulting in price drops or deflation in these sectors, representing 40% of household spending. This could counterbalance inflation in categories that consumers care about most.
Tariffs can be selectively applied regarding imports from China, such as seafood and fruit. Even during Trump’s first term, many consumer goods we don’t produce in large quantities were exempted from tariffs. We anticipate a similar approach this time around, with certain seafood, fruits and vegetables being excluded from any tariff impositions.
The manufactured goods we send to China — like aerospace, chemicals and high-tech circuits — are vital for China’s industrial and economic ambitions. Aiming to become a global economic powerhouse, China cannot afford to significantly reduce its dependency on these imports. Tariffs on these goods might be attempted, but ultimately, China would suffer more as these products are indispensable for the country’s development and not easily sourced elsewhere.
In summary, strategic tariff application on our exports to China could not only protect U.S. industries but also potentially benefit U.S. consumers by lowering prices in key spending categories, all while maintaining leverage in high-tech and critical sectors where China’s needs are inelastic.
