By: Dr. M. Ray Perryman
Published in syndication May 15, 2019

The United States and China have been attempting to negotiate a trade agreement for a while, but as I am writing, no deal has been reached. The sooner, the better.

Tariffs (which are largely taxes paid by US households and firms) have already reduced the volume of trade in both directions. According to recent data, US imports from China decreased from $123.1 billion during the first quarter of 2018 to $106.0 billion in the first quarter of 2019. Simultaneously, US exports to China fell from $32.0 billion to $26.0 billion. In fact, during this period, Mexico eclipsed China as the largest US trading partner.

Free trade is clearly beneficial. Basic economic theory and centuries of evidence support this fact. The notable declines in trade driven by tariffs are harmful to both nations. Although the Chinese economy is more export-oriented than the US, American families and firms are also feeling the effects.

One thing that seems to be lost at times in the discussion is that, when the US imposes tariffs, people in the US pay more for Chinese goods, as tariffs are collected at the border and largely passed on to consumers and producers. (How much gets absorbed by US interests depends on arcane measurements of the relative elasticities of supply and demand, but the bottom line is that we pay more.) Some of these products are consumer items, while others are inputs for US goods. Household budgets are affected, as are firm profits and competitiveness. When China retaliates with its own tariffs, US exports become less affordable for Chinese customers, purchases are reduced, and US firms suffer in the huge Chinese market. The current tariffs could add $500 or more to the annual costs of operating a US household, and more are being threatened. Simply stated, this stuff is real!

Even beyond tariffs are changes in investment patterns, supply chains, and strategic plans. Chinese investments in the US have fallen sharply. Already, corporations have announced moves from China to other nations for manufacturing facilities to avoid trade complications. In some industries such as electronics, divergence of the US and China can affect global standards. If a Chinese protocol for 5G doesn't precisely match that of the US, for example, enormous inefficiencies with profound implications will occur.

The more the two largest economies in the world can interact, the better they will perform, which generates advantages for virtually all nations. At the same time, it is essential to protect intellectual property, ensure national security, and keep the playing field level. A trade agreement that deals with these issues and reduces or eliminates tariffs would not only positively affect the US and China, but would also yield substantial global benefits.