Economists closely monitor the unfolding scenario as Donald Trump's protectionist trade plans with China take shape.
The incoming US president proposes a 60% tariff on Chinese products, coupled with an additional 10% tariff recently announced. Goldman Sachs projects a 90% likelihood that Trump will fulfill these promises, setting the stage for wide-ranging trade confrontations with Beijing.
Such tariffs, however, will not leave US producers unscathed. Here are three key ways the proposed measures could impact American industries:
1. Increased Costs for Intermediate Goods
Chinese-made intermediate goods face substantial price hikes, potentially disrupting several US industries. While only a fraction of American products depend on Chinese inputs, sector-specific reliance varies.
On average, intermediate goods from China represent 0.3% of gross output in US industries. This minimal dependence shields many producers from significant price swings. However, Goldman anticipates an average 20 percentage point rise in input costs, creating ripples in sectors heavily reliant on Chinese imports.
Industries such as automotive, machine tools, furniture, and textiles are particularly vulnerable due to their reliance on Chinese intermediate goods. With slim profit margins, a 10% to 30% increase in operating costs could significantly strain these sectors.
2. Retaliatory Tariffs Impact US Exports
China’s potential retaliatory tariffs pose a direct threat to US exporters. According to Goldman, over 80% of US wood, cereals, iron ore, and animal product exports find buyers in China. Additionally, more than half of US soybean exports and nearly 20% of automotive exports are destined for the Chinese market.
Agriculture and forestry sectors stand at the highest risk, with over 60% of their export revenue tied to Chinese buyers. The scenario recalls the tit-for-tat tariff war during Trump's first term, when both nations levied tariffs worth hundreds of billions of dollars against each other.
Already, Trump's additional 10% tariff pledge has drawn sharp criticism from Beijing, echoing the trade tensions of 2018.
3. Non-Traditional Retaliation from China
China could deploy non-traditional forms of retaliation, leveraging its dominance over raw materials critical to US industries. The US relies on China for more than 70% of imports like natural graphite, rare-earth compounds, and antimony oxides. These materials are essential for producing electronics, automobiles, and defense technologies.
The absence of easy substitutes for these exports heightens the risk of supply chain disruptions, potentially impacting production in pivotal sectors.
Consumer-Side Effects and Inflation Risks
As trade tensions rise, concerns about consumer inflation grow. The Conference Board’s Expectations Index highlights consumer apprehension over potential price increases. Economists warn that tariffs could reignite inflationary pressures in the US.
Goldman, however, predicts moderate price increases for most goods. Items like durable household products, footwear, clothing, and consumer electronics, which depend heavily on Chinese imports, may see price hikes of 1% to 2% on average, and up to 10% for China-specific products. Overall, personal consumption expenditures could climb by 0.24%, adding to the 2.4% annual rise recorded this month.
China's Retaliation in Action
China has already begun retaliatory measures in response to recent US semiconductor bans. Beijing has restricted the export of critical materials like graphite, signaling its willingness to leverage its market dominance as a strategic countermeasure.
These developments underscore the multifaceted risks for US producers and consumers alike, as the trade standoff intensifies under the Trump administration’s protectionist policies.
