Dive Brief:

• As trade wars ramp up, the cost of producing goods for export will rise and make U.S. exports less competitive, according to analysis by economists at The Federal Reserve Bank of New York.
• The analysts examine the assumption that a rise in tariffs will lead imports to fall, and restore balance in the U.S. trade deficit. However, they argue, tariffs also lead import costs to rise, which may negatively affect U.S. producers preparing exports as well, and thereby nullify the deficit-effects of tariffs.
• The analysts note countries that reduced tariffs actually saw increases in growth of both imports and exports. After joining the World Trade Organization (WTO) in 2001, China reduced its average tariff on imports by 40%. The result was more than 25% growth rates on both imports and exports in the following five years, as compared to five years before joining WTO.

Dive Insight:

There’s a lot at stake for U.S. business in the trade wars to come. According to financial website The Balance, United States total trade with foreign countries was $5.2 trillion in 2017 — $2.3 trillion in exports and $2.9 trillion in imports of goods and services. The U.S. was the world’s third-largest exporter (following China and the European Union) and second-largest importer (following the EU).

With all the talk of tariffs, retaliations and escalations—especially with China—the supply chain picked up added stress as many retailers rushed to speed up imports from that country. They hoped to beat additional tariffs while ensuring they have enough stock for the winter season. That includes back-to-school, fall fashions and the year-end holiday season.

The Port of Los Angeles, for example, which, combined with the nearby Port of Long Beach, handles about 40% of the nation's containerized import trade with China, reported that July volumes rose by 4.6%. In fact, imports at East Coast ports were at an all-time high in June.

However, the fate of U.S. trade may change if costs are allowed to rise as a result of tit-for-tat tariffs.

In a research paper the New York Federal Reserve explained that “by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the U.S. export market and compete with other firms. With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their U.S. market shares. A large part of the market-share gains stemmed from new varieties of goods exported by Chinese firms entering the U.S. export market.”

A rise in tariffs may lead to the opposite scenario, both in China and the U.S., and an overall drop in trade, according to Federal Reserve economists.

Seeking to avoid that scenario, a Chinese delegation will travel to the U.S. later this month to discuss trade issues. It could mean a sigh of relief for business, on both sides of the ocean.