[Bloomberg Column] The Second US-China Trade War Is an Economic Disaster

Trump's Tariffs on China Increase Costs 25-Fold
Low Revenue and Significant Economic Impact Expected
US Economy Projected to Lose 2000 Trillion Won

Concerns are growing that the high tariffs advocated by former President Donald Trump will not only destroy the U.S. economy and severely damage global supply chains but also devastate the federal budget.

Currently, U.S. companies are lobbying President Joe Biden to reduce or eliminate the tariffs imposed by former President Trump on Chinese imports. However, Trump, who is running as a Republican candidate in this year’s U.S. presidential primary, is taking a stance more than twice as tough as in previous years. In fact, it is five times tougher. According to reports, if Trump succeeds in his re-election bid, he is considering imposing a 60% tariff?five times the current average of 12%?on all Chinese imports. (Subsequently, in a recent interview with Fox News, Trump stated he would impose tariffs exceeding 60%.)

Even that underestimates the negative impact that higher tariffs could have. A simple calculation suggests that the new tariffs would cost 25 times more than the existing trade restrictions. This would not only destroy the U.S. economy and severely damage global supply chains but also negatively affect the federal government budget.

The U.S. Tax Foundation estimates that the existing tariffs on Chinese products cause an annual economic loss of about $60 billion (approximately 80.04 trillion KRW). However, the damage caused by tariffs increases proportionally to the square of the tariff rate. For example, doubling the tariff rate quadruples the damage. Therefore, if the U.S. raises its tariffs on China fivefold as Trump proposes, the annual loss to the U.S. economy would be about $1.5 trillion (approximately 2,000.1 trillion KRW).

Moreover, tariffs of this magnitude could shock global supply chains as producers rush to find alternative sources to replace Chinese imports.

In response to tariffs during the Trump era, importers shifted their sourcing to third countries such as Vietnam and Mexico. However, most of these imports are still produced in China. A 60% tariff is so enormous that any attempt to evade it becomes futile. For example, manufacturers would know that even small regulatory changes, such as declaring products containing Chinese components as Chinese imports, could weaken their competitiveness.

The possibility of Chinese retaliation and further escalation of tensions on both sides would prompt many companies to completely remove Chinese products from their supply chains. However, the resulting disruption would be greater than what occurred after the COVID-19 pandemic and could lead to a painful recession.

Furthermore, it would also impact the federal budget, with even more devastating consequences. Former President Trump likes to boast about how much revenue his tariffs generate, but in reality, total revenue is minimal. According to estimates by the Tax Foundation in 2018, $74 billion (approximately 98.6716 trillion KRW) in revenue could be collected over ten years through 2027.

Tariffs are deliberately designed to reduce imports. Therefore, increasing tariffs fivefold does not increase federal revenue fivefold. Nevertheless, even if we assume that the tariffs imposed by Trump would increase revenue fivefold, such high tariffs would only generate about $370 billion (approximately 493.358 trillion KRW) over ten years.

On the other hand, the economic contraction caused by tariffs would reduce both GDP and federal government revenue. In 2001, a relatively mild recession occurred, resulting in imports decreasing by more than 10%, from $2.03 trillion (approximately 2,706.802 trillion KRW) in 2001 to $1.78 trillion (approximately 2,373.452 trillion KRW) in 2003. Adjusted to current figures, even a mild recession could cause an annual import reduction exceeding $500 billion (approximately 666.7 trillion KRW). This loss would far exceed any revenue generated by tariffs.

Meanwhile, if the Federal Reserve (Fed) responds to inflation caused by high prices and wage increases due to tariffs by raising interest rates, it would increase federal debt servicing costs and further worsen the fiscal deficit. Combined with reduced output and increased interest payments, the U.S. fiscal deficit could increase by $800 billion (approximately 1,066.72 trillion KRW). This estimate does not include the costs of increased unemployment benefits and economic support for state governments.

Of course, some assumptions are necessary to calculate the effects of such a large tariff increase. That is the nature of economic forecasting. However, one thing is absolutely clear: imposing a 60% tariff on Chinese products would be a disaster for the U.S. economy and finances.

Karl W. Smith, Bloomberg Opinion Columnist

This article is a translation by Asia Economy of Bloomberg’s column 'Another Trade War With China Would Be a Fiscal Disaster.'