US-China ‘Trade War’ numbers

Warning: this post contains estimates which could be off by billions of dollars. And it doesn’t matter. In technical terms, the good stuff is much, much bigger than the bad stuff. Current American economic gains are much bigger than the current and anticipated cost of the US-China trade dispute. A few points:

(1) According to the Bureau of Economic Analysis, American gross domestic product (GDP) has breached $20 trillion. The first estimate for the rise in GDP in the second quarter alone is $362 billion. The increment over the past four quarters is $1.04 trillion. GDP is a top-down measurement of economic activity with no direct relation to family or individual prosperity. An indicator that actually matters to people and their families is,

(2) According to the Federal Reserve, American household net worth (HNW) has breached $100 trillion. HNW rose $6.6 trillion from Q1 2017 to Q1 2018. The smallest annual increment to HNW in the last seven years is $3 trillion, in 2015.

To the trade war. The crucial factor is the availability of substitutes, both across countries and over time. Note:

(3) Soon, nearly $50 billion in annual imports from China will be subject to 25 percent tariffs. If the PRC can’t trans-ship around tariffs, nearly all these products will be displaced, primarily by imports from other countries. Given the availability of substitutes, the price increase for the $50 billion will be small, making for negligible harm to the US economy.

(4) For this batch, Beijing has retaliated in kind. For goods such as soybeans, there is no substitute for the Chinese market. In these cases, American producers can only hope to sell to other countries which then sell to the PRC, at the cost of a mark-up. If Chinese tariffs persist for a year, total American exports could drop $15 billion.

(5) The US may apply a 10 percent tariff on $200 billion more in Chinese products, and possibly the full $500 billion or so not facing 25 percent duties. An 8 percent decline of the RMB against the dollar from its 2018 peak means the impact on the PRC is being blunted. For the US, there are easy substitutes for some China-made products — but not all, and a 10 percent price rise can apply. Comprehensive 10 percent tariffs would cost in the several tens of billions.

(6) Beijing has not yet signaled retaliation for the 10 percent tariffs. However, the risk of retaliation can weigh on financial markets, lowering HNW. China could surprise with a drastic future step, but RMB depreciation should already be priced into stocks and bonds. President Trump first publicly mentioned the 10 percent tariff June 18. As a proxy for broader markets, the S&P 500 was slightly higher on July 27 than before the president’s threat.

(7) The US authorized tariffs on close to $50 billion of metals from all sources, 25 percent for steel and 10 percent for aluminum. The process of determining exclusions remains unclear, but there will be fewer substitutes than for PRC-only tariffs. The Chinese share of this, however, is less than 10 percent and weighted to aluminum. The impact of higher China prices is minor.

(8) The administration is considering tariffs on up to $325 billion in autos and parts imports from all sources, level not yet indicated. The worst case would dent the economy, in large part because there would be few substitutes available. For the PRC alone, the US imported $16 billion in autos and auto parts in 2017. An exchange of 25 percent tariffs at that volume would cost less than $10 billion in higher prices and lost exports.

Bottom line

The dispute with China has had no discernible impact on American household wealth. If tariffs spread, they could cut GDP about $60 billion the first year, with GDP most recently adding $1 trillion annually. With a fast-growing economy, the Trump administration should not be running a large and growing budget deficit. But the administration is right to have little fear of the US-China “trade war.”