Donald Trump is expected to announce a new round of tariffs on Chinese imports in the next few days. According to the Wall Street Journal, the president is planning to target $200 billion worth of goods with a 10 percent tax at the border. Politically, this may be a significant development. Economically, however, it’s not.
Officials from Washington and Beijing are scheduled for talks later this month to try to ease the tit-for-tat battle over trade that has already seen the U.S. place tariffs on $50 billion worth of Chinese goods, and China retaliate against sensitive American industries like soybeans. If Trump goes forward with the new levies, he will have placed tariffs on more than half of all Chinese exports to the U.S. Officials in China are suggesting that they may call off the upcoming meeting in response. “China is not going to negotiate with a gun pointed to its head,” a senior official who advises the leadership on foreign-policy matters told the Journal.
That’s a dramatic quote. But the effect of this move on the economy would probably be far less dramatic—it might barely even be noticeable. That’s because over the past five months, the value of the the dollar has risen about 9 percent versus the yuan. That has already blunted the impact of the White House’s previous levies and means that this newest round won’t force importers to pay much, if anything, more for Chinese goods than they would have three months ago.
Here’s a little back-of-the-envelope math to illustrate the point: Say you manage an American company that buys widgets from Shenzen, and each widget costs 100 yuan. In April, when one buck bought 6.28 yuan, that widget would have run you $15.92. Today, with the dollar trading at about 6.87 yuan, it would cost you $14.55. Trump’s 10 percent tariff would add $1.46 to the price, for a final tally of $16.01. The widget only ends up 0.5 percent more expensive than it would have been earlier this year.
Of course, small differences in price can make a major difference to companies. If you’re importing cheap sheet metal in bulk, those pennies add up. But exporters don’t always pass on the full cost of a tariff to their customers abroad, sometimes choosing to eat the adjustment rather than potentially lose market share. It’s possible many American businesses—and customers—will end up being spared by their suppliers.
Why bother with a tariff so low that it barely makes up for recent currency fluctuations? In August, the White House threatened a tariff of 25 percent. But according to the Journal: “The level was lowered following extensive public hearings and the submission of written comments where importers and others complained of the possible impact of the duties—and to try to reduce the bite on American consumers ahead of the year-end holiday shopping season, these people said.” In other words, it seems like this action is designed to satiate Trump’s desire to play hardball without causing too much stress for parents buying Christmas gifts.
It’s always possible Trump could escalate things further—“people familiar” with the issue told the Journal that the president might bump the tariff to 25 percent if China doesn’t crack on his demands over things like intellectual property protection soon. At that point, it becomes a question of whether Beijing will let the yuan fall even further to compensate. For now, it seems like we’re watching a cat-and-mouse game between Trump’s tariffs and China’s currency.