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Tariff Hikes More Likely to Divert Trade Than Reshore Manufacturing, Report Says

Friday, February 22, 2019
Sandler, Travis & Rosenberg Trade Report

The increased tariffs the U.S. and China are imposing on each other’s products are not likely to be very effective in protecting domestic companies and instead will mostly divert trade to other countries, according to a new study from the United Nations Conference on Trade and Development.

The study estimates that of the $250 billion in Chinese exports currently subject to the U.S. Section 301 tariff increases, about 82 percent will be captured by firms in other countries and roughly 12 percent will be retained by Chinese firms, with only about 6 percent captured by U.S. firms. Similarly, of the approximately $110 billion in U.S. exports subject to China’s retaliatory tariffs, about 85 percent will be captured by firms in other countries and U.S. firms will retain less than 10 percent, with Chinese firms capturing only about 5 percent. According to the study, these results are consistent across different sectors, including machinery, wood products, furniture, communication equipment, chemicals, and precision instruments.

UNCTAD states that countries likely to benefit the most are those that are more competitive and have the economic capacity to replace U.S. and Chinese firms. European Union exports are likely to increase the most, capturing about $70 billion of U.S.-China trade ($50 billion of Chinese exports to the U.S. and $20 billion of U.S. exports to China), and Japan, Mexico, and Canada are projected to each capture more than $20 billion. Substantial effects relative to the size of their exports are also expected for Australia, Brazil, India, the Philippines, Pakistan, and Vietnam.

However, the study adds, there could be negative effects as well. One concern is that more countries may take similar measures, escalating protectionist policies to a global level. In addition, upstream suppliers of the products caught up in the U.S.-China trade war could see significant reductions in business as buyers source elsewhere.

For more information on the Section 301 tariffs, please see our Tariff Action Resources Page.

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