Economists pour cold water on Trump’s tariff arguments

Economists have said US President Donald Trump’s argument that American consumers will not face higher prices after tariff increases shows “a fundamental misunderstanding of how tariffs work”.

Read more: China retaliates with tariffs on $60bn of US goods

Trump tweeted today: “Their [sic] is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China today.”

The president has long argued that tariff costs are paid by China, tweeting on 5 May: “The Tariffs paid to the USA have had little impact on product cost, mostly borne by China.”

He has also said that tariffs on goods from China provide a boost for the US economy, crediting them with helping it achieve a 3.2 per cent annual rate of first quarter GDP growth.

https://twitter.com/realDonaldTrump/status/1127886307118678016

However, economists have poured cold water on Trump’s claims, highlighting the fact that it is not China who pays the import costs but US firms who choose to import the goods.

Andrew Hunter, senior US economist at Capital Economics, said: “The idea that it's a tax on China, I think we can say that's definitely not true. It's obviously a tax on Chinese goods when they come into the US.”

According to Gregory Daco, chief US economist at Oxford Economics, when goods are tariffed, “the higher prices on the import side are then passed on to consumers or to businesses via higher input costs or via final goods that are more expensive”.

“In both cases those tend to hurt the US economy and not the Chinese economy,” he said.

“That being said,” Daco added, China would suffer from “reduced competitiveness if when it exports to the US it has that additional cost to factor in”.

Addressing Trump’s claim that the US prices have not been affected, Hunter said: “There hasn't been much upward pressure on US prices.”

“The Chinese renminbi has depreciated by about 10 per cent or so over the last year, so that’s offset a good part of the impact” by making Chinese goods cheaper, he said.

Yet Hunter said an increase of tariffs on nearly all Chinese goods – as US trade representative Robert Lighthizer said on Friday he was preparing – would “start covering consumer goods and goods that can basically only be purchased from China”.

Such a move “could put more noticeable upward pressure on prices,” he said, as there would be no alternative but to buy from China.

Fiona Cincotta, senior market analyst at City Index, said that if the US did increase tariffs on all of its goods, “the impact on Chinese exports and the Chinese economy would be substantial”.

Read more: US markets follow Europe downwards as China announces retaliation tariffs

Neil MacKinnon, global macro strategist at VTB Capital, said: “There are no winners in a trade war”.