Clipped from: https://www.thehindubusinessline.com/opinion/editorial/chinese-checkers/article69571083.ece
US has upper hand in trade deal with China
An overwhelming proportion of US imports from China comprise wage goods and other low value added items | Photo Credit: KEYSTONE/EDA/Martial Trezzini
So, as was only to be expected, the US and China have agreed to reduce tariffs on imports from each other. The absurdly high levels announced a few weeks ago weren’t sustainable. That’s why the reduction isn’t a surprise, although the speed with which it has been agreed upon is. And whatever Trump baiters say, it’s a clear win for him because America will charge 30 per cent and China will charge only 10 per cent. These rates will hold for 90 days.
What happens after that is a matter of negotiation. Regardless of the new negotiated rates, US will charge a flat 10 per cent on all imports from the world. That, too, is a win for Trump because it’s not negotiable. Until he raised the rates, America was charging around 3 per cent. To the extent that the US-China mean rate of around 20 per cent serves as a benchmark, the world can now expect a rate somewhere there or thereabouts to apply to different countries. Much, of course, will depend on the elasticities of demand in the US and the substitutability of sources of supply for it. The more inelastic the demand for something and the more difficult it is to find substitutes, the less will be the tariff because it will basically be a seller’s market. In this overall context, it is not widely known that China does quite badly on this count. This is because an overwhelming proportion of US imports from it comprise wage goods and other low value added items. It’s a high volume low margin export strategy. China captured this market by a combination of predatory pricing, implicit subsidies and currency manipulation. But the new tariffs will nullify most of those advantages. Also, there are other countries that can supply such things.
This will work to the advantage of the rest of the world which can benefit from the substitution effects. Trump seems more focused on shrinking the huge trade deficit with China than with the rest of the world. The US’ trade deficit with China, at $296 billion in 2024, is about a third of its overall trade deficit. Some Southeast Asian countries, given this scenario, have already grasped the opportunities. India, sadly, has not. There are opportunities for sure but Indian businesses are not known to grasp them swiftly. Another benefit for India could be a slowing down of dumping by China into India to compensate for the lower volumes exported to US.
This episode shows how in spite of all the doomsday prophecies for US it continues to be the Big Man on Campus. It’s nearly twice as big as the Chinese economy which is not small either at a GDP of around $15 trillion. The consensus, fostered by Chinese propaganda, has been that it’s US that needs China. The 30 per cent v 10 per cent tariff imbalance shows that it’s really the other way around. Along with the technology denial laws that President Biden put in place in 2023 China will have to recognise the need for fairer trade policies.
Published on May 14, 2025
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