Would the Chinese economy collapse as a result of Trump's proposed tariff plan?
Make America Less Great
The idea, let’s say, is a 45% tariff on all Chinese exported goods to the States. Is the Chinese economy so reliant on U.S. exports that this would form a problem within the Chinese economy if prices went up? How stable is it?
Ignoring the feasibility of actually implementing such a plan, getting it through Congress and getting past the idea that it violates a number of international treaties and multi-lateral institutions that serve as a foundation for our current global economy ...
China’s export industry would certainly experience significant disruption in the short to medium-term as such a large tariff would have a major impact on most goods whose last port of departure is in China.
Prices would rise significantly, particularly on consumer goods i.e. the majority of what you see at your local Wal-mart, Target and/or Amazon. To get a sense of how that feels, next time you buy something at one of these places, mentally slap an extra 50% onto the price.
Other export-centric economies that sit farther upstream in the value chain would also be significantly impacted. For example, Germany, South Korea, Japan and Taiwan would get hit particularly hard. These negative effects would continue to reverberate across the very inter-linked global economy.
It is almost 100% certain that China would immediately retaliate with a similar tariff on American imports. China is the third-largest export destination for the United States. This would have deleterious effects on a broad swathe of American industry and agriculture.
Other countries – after watching the leader of the Free World violate or otherwise renege on numerous international treaties – will probably decide that they do not need to follow global rules either. The current global order – one which took decades of multi-lateral effort led by the United States to build – could easily collapse. This could actually work in China’s favor, as they would be more than happy to start from scratch and help write the rules of the new global system.
Trade protectionism would skyrocket and global trade would plummet. The world economy would very likely enter a deep global recession/depression, as bad or worse than the 1930s.
Chinese factory work is not the type of work Americans should aspire to ...
Trump is advocating this tariff because he thinks it will create jobs for hard-working Americans or at least get back all those jobs the Chinese “stole”.
Now if you have ever visited a typical Chinese export factory, you will quickly realize that much of China’s value-add still comes from labor-intensive and relatively dull work. These are simply not the types of jobs that Americans should desire or strive for. They left as part of the creative destruction process called innovation and “moving up the economic ladder”.
Trying to bring back these jobs is like turning back the clock on progress by about a century. Creating low-value added jobs is incredibly easy for highly productive countries like America and I can think of a thousand other easier ways to create them ... like replacing softswitches with human telephone operators or getting rid of ATMs and bringing back bank tellers and savings passbooks. While we’re at it, we might as well trade in our “horseless carriages” for buggies – that’s sure to create millions of jobs taking care of these fine beasts!
Arguably, the types of jobs that Americans should want to keep are the higher value-added jobs that the wealthier German, South Korean and Japanese economies have successfully generated over time across a wide range of advanced manufacturing, technology and services industries. I absolutely reject the belief that increased protectionism through higher tariffs is ever a good thing, but if you are going to do it, it would be far more effective by first going after these countries before China.
Most Chinese workers would love to switch places with American workers. Be careful what you wish for.
The world economy will eventually adjust but at a lower standard of living for all ...
As described earlier, the initial economic shock would be significant. It would probably be a situation very similar to what we saw following the Global Financial Crisis in 2008 when global exports contracted sharply. However, just like then, I doubt this would lead to any sort of total economic “collapse” in China.
After the initial shock, Chinese exporters would start to adjust their business models to the new reality. For example, some may shift their sales and marketing efforts to focus on China’s own domestic market, the Eurozone and the developed world. Others would look for creative ways to get around the “China tariff”, such as investing heavily in final assembly operations in other countries like Mexico, Vietnam or Myanmar. This economic model would likely be less efficient than before, but that is the price of protectionism.
Meanwhile, the incremental American jobs that might be created or saved by this special China-specific tariff would likely be overwhelmed by the jobs that are lost in industries impacted by retaliatory tariff measures by China and other countries as well as the job losses that would result from a global depression.
Assuming things do not continue to escalate, the world economy would eventually settle down, albeit at a lower standard of living than before.
And the biggest risk of all ...
The biggest risk is what happens if things do continue to escalate. And it’s not like we haven’t heard this story before:
One of the root causes of the Great Depression in the 1930s was the rise in trade protectionism and economic nationalism that led to plummeting global trade and skyrocketing unemployment. This environment became fertile ground for extreme right-wing parties to incubate and led to the rise of Nazism and Fascism in the 1930s (frankly, we are seeing some echoes already of that today). It took a global war and the deaths of between three to four percent the world’s population to ultimately fix this.
So to answer the original question: Yes, China’s economy would be worse off. But so would America’s, as well as most of the rest of the world.
“Those who cannot remember the past are condemned to repeat it.” – George Santayana
This was originally published on Quora in March 2016.