Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

US 25% Tax on Imports from China?

Posted by butalidnl on 19 March 2010

New legislation has been introduced in the US Senate to make it easier for the USgovernment to declare that China is manipulating its currency. When it does make such a declaration, the lawmakers are pushing the government to slap a 25% import tax on all imports from China. While this will unleash a trade war, the US lawmakers don’t seem to be afraid, saying that forcing the Chinese to raise the value of their currency will be worth it.

Shooting at its own foot
I doubt that a 25% tax on Chinese imports will help the US.  While the strengthening of the Chinese Yuan vis-a-vis the US Dollar would help US exports, and even reduce imports; a one-sided tax on all Chinese imports would most likely backfire, and would hurt the US much more than it would hurt China. The proposed tax will make Chinese products in the US more expensive, and probably reduce volume of imports by a bit.  But it will not in any way induce the Chinese to import more US products. In fact, the most likely response by China will be a reciprocal tax on US products, if not an outright ban on certain US exports.

And let us take a closer look at the effect of the US import tax. The effect will be that the price of Chinese-made products will rise by up to 25%. Actually, it will be less than that, since part of the increase will be absorbed by importers/retailers in a bid to maintain their market shares. The US consumers will suffer a big cut in their purchasing power, since many products have hardly any ready alternatives, and they will have to buy the marked-up products (at least for a while).  The extra money that US consumers will have to use to buy the more expensive Chinese products will be taken from not buying other products, which they will not be able to afford anymore. This will cause a decline in sales of a whole range of products, resulting in job cutbacks.

Import Substitution?
Wouldn’t US production of these products replace the Chinese ones? Normally it should; but since US producers will be starting from a standing start, it will take them time to try to do this (probably a year or two). Retailers will most likely source the products from elsewhere in Asia – producers from India to South Korea have the plants and would only need to scale up their production. In fact, some companies have plants in China and other Asian countries, so it will be quite easy for them to shift production. Contracts could be closed with them rather quickly. And they will offer their products – from Bangladeshi garments, to Philippine furniture – at prices lower than the marked up Chinese products (note: not the old Chinese prices). So, the US tax will in effect be promoting the exports of other countries, and not reducing overall US imports. And the only difference is that the US will then be paying a higher price for everything.

And then there is the inflation. With the 25% import tax, the overall price level will increase by probably about 5% over the intrinsic inflation. This would be a rather problematic situation for the US Fed. They may have to increase interest rates before they are ready. Any increase in interest rates will mean that the US debt burden will increase.

Inflation holds the danger of further devaluation of the US dollar. And while some say that this is good, since it will promote exports and reduce imports (or so goes the theory). The US is a net importing nation, and this means that when its currency devaluates,  the price of its imports will rise accordingly. The price of oil, for example, will rise with a devaluation of the dollar.

Chinese Response
And what has China to do in response? Well, for one, it could restrict the entry of US products. But even if it didn’t, the resulting  inflation, price rises of imports, and unemployment will hit the US anyway. But with the restricted entry of US products, US exports will be reduced. And all this is even without China playing its trump card – dumping its US treasury bills in the international market.

China holds about $900 billion worth of US treasuries. If it sells them all and exchanges them for Euro, Yen, Pounds etc. the US Dollar will really devaluate, and the interest the US will have to pay on them will have to rise. And the dumping of dollars by China will also push other moves e.g. countries like Saudi Arabia abandoning the dollar peg, and the possible pricing of oil using a basket of currencies and not the dollar. Chinese dumping of US dollars will set off a chain of events which will cause a dollar crisis, one which has been overdue. And when the crisis starts, US hedgefonds will abandon the dollar en masse, making the currency depreciate even faster.

So much for doom scenarios. It will only happen when the US does something stupid like slapping an import tax on Chinese products. Right now, an unusual alliance of US companies are lobbying intensely against it – importers and exporters alike see this as a threat to their profitability, and are working to stop such a law. So, let us hope that the cool heads prevail in the US, and that they will be satisfied to wait till the Chinese float their currency for their own reasons.

20 Responses to “US 25% Tax on Imports from China?”

  1. Since we appear to be in a US 25% Tax on Imports from China? Carlo's Think Pieces state of mind, There is no point in buying uncomfortable patio furniture just because it is cheap. It is well worth spending a little more to get the quality and comfort so important in outdoor garden furniture.

  2. PH Test said

    the patio furnitures that we use at home are leather covered and they are really nice -`~

  3. A U.S. Import tax is not a bad idea at all. We need take action against China’s cheating. And the import tax seems like a great idea. At the very least, the U.S. govt needs to grow a spine and pass a China tax in the House. That might be the pressure China needs to start floating!

    • butalidnl said

      A tax on imports from China will mean that cheap products available in WalMart and other stores will not be so cheap anymore. I don’t think Congress will like this idea at all.

  4. Bob said

    “China holds about $900 billion worth of US treasuries. If it sells them all and exchanges them for Euro, Yen, Pounds etc. the US Dollar will really devaluate”

    And guess what? By constantly buying Chinese products, we are handing them more and more power to devalue our currency. Its now, or never.

    “The US consumers will suffer a big cut in their purchasing power, since many products have hardly any ready alternatives, and they will have to buy the marked-up products (at least for a while)”

    big cuts in theri purchasing power? This needs a cut anyway. Consumers are already consuming more than they need to be.

    “Retailers will most likely source the products from elsewhere in Asia – producers from India to South Korea have the plants and would only need to scale up their production”

    So we just raise import taxes for them as well

    “Wouldn’t US production of these products replace the Chinese ones? Normally it should; but since US producers will be starting from a standing start, it will take them time to try to do this (probably a year or two)”

    With import taxes on all countries, US companies will have ample time to set up. And once they are set up, jobs are almost sure to open up. US companies that are already in place will do nothing bu flourish, thus creating more jobs, not decreasing them. On the other hand, if US companies cant set up and flourish, we will continue eating out of Chinas hand, giving them immense power, and, in the long run, killing our economy (we just can compete!). In the short run, we have lower prices, but lower prices are no good if no one has a job, and we arent exporting the same ammount we import.

    That brings me to another point. We cant possibly export the same amount we import. Thus, US dollars are flowing out of the country, which is then used by foreigners to buy foreign currency. This, as you well know, will continue the constant decline of our currency. What would you prefer, an infinitely long period of decline, or a short aggressive downturn, that will infinitely end up increasing the value of our currency?

    • butalidnl said

      Bob,
      Your logic broke down when you proposed to impose additional import taxes on all countries. This can’t happen. Even in order to raise taxes on China, the US has to resort to declaring it a currency manipulator. It cannot possibly raise protectionist taxes against a host of other countries without violating WTO rules, and inviting retaliatory taxes on US exports. The US has profiled itself internationally as being for free trade and against protectionism. This goes directly against this image.
      The last point you made, re it not being possible to export the same amount as the US imports, is actually not true. The main reason why this is not in balance is because of the huge oil bill. If the US implements policies that would reduce the importation of oil, then the trade equation will balance.

      • Bob said

        “It cannot possibly raise protectionist taxes against a host of other countries without violating WTO rules, and inviting retaliatory taxes on US exports” A protectionist world would be beneficial in the long run. Products wouldn’t be shipped half way around the world before it hits the shelf. Sure, prices would be higher, but like I said before, a cut in purchasing power is what we need.

        “The last point you made, re it not being possible to export the same amount as the US imports, is actually not true.”
        Can you prove this? And if it is true, why cant we produce what we NEED in the USA.
        And about these policies for reducing the importations oil… what are they exactly? How is it even possible to reduce dependence on oil, in this economy we live in?

        ps, this answer is a bit rushed…

  5. Rich said

    I agree with Bob that in the short term, this would be painful but in the long term, it really is a solution that can help America get out of its current mess. Even better, if this could be combined with budget cuts and fiscal responsibility, it could really prove to be a winning plan to make America great again. The alternative is a slow and painful devaluation of the dollar and likely high or even hyper-inflation and continued dependance on China and others who do not care if America is great or not.

    Also, while American companies build up their manufacturing base again, 2nd hand products are still available. So maybe America would build our own televisions again with a short interimn of paying high prices for new TV’s or holding onto older TV’s or buying used TV’s for just a year or two. I remember when DVD players were $700 each and people still bought them. Now they are $100. IPAD’s are $750 now but I would bet my left nut they will be $250 in a matter of 2-3 years. But people are buying them at $750 in record numbers.

    So if prices for Chinese made goods went back up for a year or two until production gets up to speed here, then so be it for a long term strong economy here in America again. So the trump card is more jobs here in America. I would rather see thousands more $35,000 per year jobs created here in America making televisions again that cost an extra $300 for a couple years only to decrease to nearly current prices yet those thousands of $35,000 manufacuring jobs will remain here where we need them and even more will be created. Jobs are the key and mean everything here in America.

  6. Ann Hughes said

    So what does the author suggest? That we keep accepting an unsustainable, high trade deficit because we don’t want to rock the boat? That we continue to allow currency manipulation or a country that slaps us with high tariff fees for goods coming from the U.S. but goods coming from China shouldn’t have the same high tax? How long are these unfair economic policies to be tolerated?
    Manufacturing needs to be a cornerstone of our economy but it remains in free fall, much to our unwillingness to address these issues head-on. We simply can’t keep looking the other way.

    • butalidnl said

      US imports into China are only taxed an average of 1.5%, which in my opinion is not an excessively high rate. Perhaps the Chinese are keeping their currency overvalued; but they can’t change that too fast, or the US dollar will crash, and their markets will shrink.
      What should the US do? For one, it could slap a substantial tax on oil – something like $100/barrel or so. This will reduce oil imports, raise money for the government, and force American industry to be more efficient. If the US wants to restrict other imports, it could try steepening the quality standards for ALL imported products (and/or require labor and environmental standard certification) – this will raise prices, but at least you get better products.
      The problem with the US trade deficit lies in the inefficiency of producing things in America. Look at the case of Germany, which runs a trade surplus with China. The Germans aren’t raising taxes, they are making better products. America should wake up to the fact that they are lagging many countries in technology (in some areas, even lagging behind China). They should catch up with the world, and stop whining.

      • Steve said

        Germany has a dollar for dollar import/export limit on Chinese goods.
        My own company tried to export an order to China last year and the tax was 27%
        (that killed the order)
        $100 a barrel tax on oil eh! That wouldn’t “force American industry to be more efficient” it would force them to close their doors.
        Some of your ideas have merit but I think your position is definitely your opinion and your facts come from your rear.

  7. Ann Hughes said

    We’d stop the “whining,” as you call it, if we had not been deliberately transformed into a service/retail economy by our own government policies. We can produce a good product, if given the chance.
    What I had heard was that China puts a 25% tariff on our exports and we put a 2.5 percent on theirs. Can you supply me with a link to your figures?
    Don’t necessarily agree we’d have
    to put tariffs on products from all countries as some have quality manufacturing.
    We need a manufacturing policy that works for the U.S. worker, not the world. Right now, we are the world’s dumping ground.

    • Steve said

      We do make good products! We are in a trade war with a Communist country.
      When Kruschev said he would “sell us the rope we would hang ourselves with”,
      Smarter leaders than we have today refused to buy. Now we are buying it from China and apparently too stupid to understand basic economics require a means of production.
      Where we are today financially as a country is a result of an economy based on credit cards and painting each others toenails.

  8. Ann Hughes said

    To continue…we need a manufacturing policy. We need to protect high-value manufacturing. We need to enforce trade agreements. Better yet, NAFTA has been proven to be a broken model for us and we should no longer model any future agreements after NAFTA
    We cannot continue to accept unsustainable high trade deficits. In short, Americans have “had it” with “free trade.”

  9. Ann Hughes said

    We’d stop the “whining,” as you call it, if we had not been deliberately transformed into a service/retail economy by our own government policies. We can produce a good product, if given the chance.
    What I had heard was that China puts a 25% tariff on our exports and we put a 2.5 percent on theirs. Can you supply me with a link to your figures?
    Don’t necessarily agree we’d have to put tariffs on products from all countries as some have quality manufacturing.

  10. Dbiz said

    Taxing a specific market is not a new philosophy in the world market espeicialy by China. China has targeted the US for various products in the past years and played under handed business. Its about time that the US played by the international rules that we have been generous or DUMB to practice. The higher tax will initially drive inflation, but long term it will drive manufacturing and creativity that has been stifled in the US. The lose should be targeted to the big US businesses that are manufacturing products in Chaina and selling them in the US. They promot the unfair trade practices that our government and selfish bastards allowed to happen.

  11. Wade Branson said

    I wonder if the US would be violating WTO rules if it does pass a 25% tax on Chinese products?

  12. Each, individual, person, being in America, Investor, looks on life only through their own eyes, not through the eyes of what is best for America. Tax the crap out of all imports, so we can get the ball moving faster towards maufacturing in America again.
    Sure we are going to struggle, sure life will be a little difficult, maybe its time we spend a little time on our face, but, if we continue down this same path, we are not any better of people then the people who screwed up our economy.
    Over the last 30 years I have been a part of over 40 businesses in 4 states in America. What I begin to see were business owner’s more into their personal life, then into their business. There is nothing wrong with wanting and getting to live the American Dream, but, we all have a part to play in the success of America.
    Are you going to far with your American dream? Do you really stop each day to think about the direction America is heading? Could you be too cought up in your wonderful life, nothing else matters? Would you be willing to give up a few things to get America going in the right direction?
    How did American values change to the point of buying things made in China which have a very low quality. While shopping at Macys, a coat sells for $499.99, tag reads Made in China. Serious, we do not want to be in a situation saying “I didn’t see that coming.” One day china could be making many of your everyday choses. Would you like it?
    I am afrad Americans have gotten so wrapped up in themselves they can see straight, proof of this, look at how big FaceBook got in such a short time. When was the last time you shook a strangers hand and started up a conversation?

  13. Its simple, STOP BUYING PRODUCTS MADE IN CHINA, FORGET TAXES AND EVERYTHING ELSE, JUST STOP BUYING THINGS MADE IN CHINA, ITS SIMPLE BE SELECTIVE, STOP BUYING THINGS MADE IN CHINA.

  14. Joe Cruz said

    Brazil does that for years and was never punished by WTO for protectionism. The import tax protects Brazil’s domestic industries and produce from foreign competition. These tariff rates range from 0 (Zero) to 35% according to the product. Import taxes in the brazillian market are all over the place. You not only pay the regular Import tax but you are subject to a list of other taxes particular to brazilian market. Typically an importation in Brazil will double the original price of the product. Manufacturing should be the answer to America but not before an equation be resolved… The variable of that equation are:
    1- Manpower: The cost of manpower in US is too high;
    2- Oil dependency: We need to reduce our dependency on oil;
    3- Education: We no longer count with good manufacturing engineers and technicians in quantity to make such turn around;

    I strongly believe that a modern manufacturing with the right level of automation would make the difference. Plus, we need to invest on alternate fuel to oil… Ethanol (from sugar cane), biodiesel, wind, sun, etc. and finaly I believe we have to legalize the 12 million iligal immigrant living in the US now. They would be part of our low cost operators.

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