Not all tariffs are created equal

CIO Global Blog

09 Aug 2019

Tariffs have often been used to protect industries from outside competition. For example, suppose that the US permanently banned imports of all cars and car parts. Initially, the disruption to supply chains might cause parts shortages that would result in a sharp slowdown in US production, but there would be upward pressure on auto prices and a strong incentive to invest in production capacity within the US. Eventually US auto production would rise.

By 1 September, we expect nearly all goods imported into the US from China to be subject to tariffs. By analogy to the example above, you might expect that this would eventually help to boost US manufacturing. However, putting tariffs on one particular country is fundamentally different from putting tariffs on one particular good. In our view, the tariffs on China will result in lower rather than higher output in the US.

Putting tariffs on imports from China will certainly encourage US importers to find substitutes elsewhere. Since it's only China getting hit with high tariffs, there are plenty of other countries for importers to choose from. Rather than relocating production to the US, the companies that were exporting from China to the US would likely shift production to a low-wage country rather than building a new factory in the US.

Further, the tariffs on China will encourage existing US manufacturing to move out of the country. For example, a US company that uses a lot of Chinese parts in their production process will have a strong incentive to move their factory across the border to Canada or Mexico. They would not have to pay the high tariffs on Chinese parts, and they would still be able to export their products to the US without tariffs under the existing free trade agreement. They also would be able to export to China without getting hit with China's retaliatory tariffs on US goods.

We believe the US-China trade dispute is lose-lose for the two countries. If the US is able to get significant trade concessions from China, then it might be worth it in the long run, but in the near term, the manufacturing sectors of both countries will suffer.

Author:

Brian Rose, Senior Economist Americas, UBS Financial Services Inc. (UBS FS)