BANGKOK — President Donald Trump has seized on tariffs as the weapon to bend other countries, and particularly China, to his will as he tries to fulfil campaign pledges to make America great again. A topic that usually only occupies the minds of economists and CEOs has been elevated to water cooler conversation as stock market gyrations wiped trillions of dollars from investment funds and workers’ pension accounts. Despite China’s rapid growth since the 1990s, the U.S. economy remains preeminent and its tariff policy is consequential in every corner of the globe.
What is a tariff?
A tariff is simply a tax on trade and all countries impose tariffs to varying degrees. The importer of goods pays whatever tariff rate applies and this customs revenue goes to the government of the nation where the importer is located.
Why are tariffs imposed?
Historically, tariffs were an important source of revenue for governments. This role was diminished by income and consumption taxes and as countries gradually lowered tariffs in an era of global free-trade following World War II. Tariffs can be used to protect emerging or important industries—and jobs—from competition from cheaper imports, but this can also mean higher costs for consumers and businesses, and in time, reduced prosperity in the country that extensively erects such barriers. Tariffs can also be a tool of foreign policy, used by one country to punish another for policies or behavior that run counter to its national interest.
Why is China the main target of US tariffs?
In a stunning about-face, Trump this week paused sharply higher tariffs against dozens of countries for 90 days but escalated a trade war with China, imposing a total tariff of 145% on its exports, after Beijing retaliated with increased tariffs on U.S. goods. The U.S. has a litany of complaints about China’s trade and industrial policies such as subsidies that create an unfair playing field, barriers to U.S. companies operating in China, intellectual property theft and its massive trade surplus. The U.S. also has a mixed track record in some of these areas such as subsidizing farmers.
The Trump administration is hoping it can wound export powerhouse China and force it into concessions. It is not without risks because China through its purchases of U.S. Treasury bonds plays a key role in financing the U.S. government, which has spent more than it earned every year since 2001. This situation shows a fundamental interdependence between the U.S. and China despite a tense relationship. China’s central bank receives a torrent of U.S. dollars from the country’s exports to the U.S. and then parks those dollars in U.S. government bonds.
What are the deep trends at work?
For decades, the world economy has been organized around the principle that free trade boosts economic growth and prosperity overall. The rapid increase in living standards for hundreds of millions of Chinese from abject poverty in the 1970s is often cited as proof of that theory. In aggregate terms, the free-trade proponents appear to be right but the broad picture obscures the mix of costs and benefits. In the U.S., manufacturing has declined as a proportion of the economy and employment since the 1990s.
Many Americans benefited from cheaper goods such as TVs, clothing and iPhones manufactured in China and elsewhere in Asia but at the cost of other Americans losing stable factory jobs. It was the U.S. that paved the way for China’s entry into the world economy when President Richard Nixon established diplomatic relations in 1972, ending Beijing’s quarter century of isolation. The Make America Great Again moment in U.S. politics is one of the long-range reverberations of those seismic changes.
This content originally appeared on Radio Free Asia and was authored by Stephen Wright for RFA.