May 10, 2019 / 10:14 AM / 17 days ago

Breakingviews - Trade flows will reveal the true cost of tariffs

U.S. President Donald Trump meets with China's Vice Premier Liu He in the Oval Office of the White House in Washington, U.S., April 4, 2019. REUTERS/Jonathan Ernst

HONG KONG (Reuters Breakingviews) - Trade flows, not traditional economic measures, will reveal the true cost of tariffs. Washington on Friday hiked duties on $200 billion of Chinese goods. Both sides have intimated they can survive a blow that may only slightly dent their GDP. Shifting supply chains, though, will show the extent of longer-term losses.

U.S. President Donald Trump has done what he threatened, hiking tariffs to 25% from 10% on a swathe of imports, in one of the most dramatic escalations of the months-long spat. American officials argued that Beijing had attempted to renege on a wide range of pledges already negotiated, Reuters reported. Certainly, both sides may have felt a bit more confident to press their demands after a run of good economic news.

Attention now will turn to the impact on growth, especially in China, where the economy has been stabilising. Oxford Economics estimates that Friday’s increase will knock 0.3 percentage points off China’s growth this year. If Trump follows through on his threat to tax the remaining imports, the impact could be as much as 0.5 percentage points this year and 1 percentage point in 2020.

Yet GDP is a misleading metric for trade war damage. For starters, the direct costs so far look modest. Both the U.S. and Chinese economies are humming along reasonably well, despite the tit-for-tat blows last year. One recent study put the net loss due to Trump’s trade conflicts last year, after accounting for the boost to domestic producers and tariff revenue, at only about 0.04% of U.S. GDP. What’s more, policymakers can always lean on monetary and fiscal measures to offset the impact.

That doesn’t mean that it won’t hurt, and badly. The real pain, though, will be felt in supply chains, as executives tackle the risk that expensive factories and investments will, by the stroke of a pen, find themselves in the wrong place. Companies are already dealing with real and perceived threats: last year’s tariffs are already diverting around $165 billion of trade per year, according to one study. Meanwhile, trade-dependent regions like Southeast Asia are caught in the middle, benefitting in some quarters for now, but unsure how long it will last.

GDP can recover. But a costly rewiring of global imports and exports will continue even after a deal is struck.

Breakingviews

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