Trade between China and the U.S. is significant for both countries. China is the largest exporter of goods coming into the U.S., and importer of U.S. goods.
In 2016, the Chinese government decided to limit the cross-border flow of goods by raising customs fees and import taxes. This not only hurt Chinese shoppers, but it also went against China's pledge it made when it joined the World Trade Organization (WTO) to reduce its high tariffs so that Chinese people could afford imported goods.
On April 8, 2016, the Chinese government enacted a new tariff policy that applied to products imported through e-commerce and also goods physically brought across the border. According to Epoch Times, imports of duty-free goods purchased at overseas ports of entry had been increased from 5,000 to 8,000 yuan, but anything over that amount would be hit with an additional tax rate that varied depending on the type of product. It would make it more expensive for Chinese citizens to buy foreign goods such as food, childcare, and maternity products. Companies such as Alibaba’s Tmall International would be negatively impacted.
Duty-Free News International said, “the new rules subject mainland Chinese Internet shoppers to 70% of a range of taxes which previously applied only to wholesalers. Before this, domestic shoppers were levied with a personal effects tax of 10%.”
For example, the following items increased from a 10 percent to 15 percent tax rate:
- Food and beverages
- Certain electronic products
- Gold and silver
These items increased from a 20 percent to 30 percent tax rates:
- Clothing and accessories
These items went from a 50 percent to 60 percent tax rate:
- Some alcohol, tobacco, and cosmetics
Trade is complex, but what is known is that when tariffs are enacted, it's the consumers who pay. In this case, it was Chinese consumers many of whom would get around the high prices by purchasing foreign goods through extensive overseas trave, even though this workaround went against WTO’s policy and undermined China’s credibility and reputation.
The China-U.S. Trade War
As China has grown as a dominant economic force in the world, accusations of unfair trade practices have led to a desire to force China to make changes.
Donald Trump long felt China had taken advantage of the U.S. in trade, and when elected president of the United States, he set out to do something about it. Most experts agreed that something needed to be done; however, many of them didn't support Trump's method, which was to enact significant tariffs on Chinese imports, to which China retaliated.
Starting in January 2018, Trump began placing tariffs on Chinese goods such as solar panels, machinery, steel and aluminum, and by March 2018, the list included over 1,000 categories of Chinese products.
China responded by imposing its own tariffs on U.S. goods such as aluminum, airplanes, cars, pork, soybeans, and other agricultural products. From then on, nearly every month, the U.S. and China have engaged in either adding or backing off on tariffs. In July 2018, the U.S. placed tariffs on $34 billion of Chinese goods, to which the Chinese responded in kind, striking back with $34 billion in tariffs on U.S. products. Those numbers were reduced to $16 billion in August, but by September of that year, both countries boosted tariffs to $200 billion.
A year and a half later, in December 2019, China and the U.S. were still negotiating trade terms. On December 13, 2019, Trump tweeted that the U.S. and China had come to an agreement that would reduce tariffs on some Chinese imports and China would increase purchases of American farm products. Since farmers in the U.S. have been hit particularly hard by the 19-month trade war, this was good news.
But the trade war isn't over. Trump will continue the 25% tariff on $250 billion of Chinese products, but that the 15% tariff placed on $120 billion of goods back in September will be decreased to 7.5%. He also planned to cancel the tariffs scheduled to take effect on December 15, 2019.
The Effect of Tariffs
When the top two economies of the world get in a trade war, growth slows, even in other countries. The bigger the tariff put on a product, the less likely it will remain competitive in China. It is something all companies have to face and decide if it is worth continuing to do business in a sizable market that can also be so cutthroat.
The impact is felt mostly by consumers, who generally end up paying higher prices for imported goods or products with imported components. This is true for both Chinese and U.S. consumers.
Trade wars can impact jobs, as well, as each country looks to other countries for its products. This was seen in the U.S. farming industry when the Chinese stopped buying U.S. agricultural goods and instead began to buy them from another country.
It remains to be seen if China and the U.S. will be able to work through all issues and come to a fair trade deal. While China has currently agreed to buy more agricultural products, strengthen laws protecting foreign businesses operating in China, improving intellectual property protections, and increasing transparency in currency movements, there are still billions in Chinese tariffs, that increase the costs of goods for Chinese families.