Why in the News?

After the election of the USA, Prez Donald Trump plans to impose tariffs of up to 60% on Chinese imports and 10% on EU imports to address the U.S.-China trade deficit and reduce unfair subsidies.

What are the economic impacts of imposing tariffs on Chinese imports?

The imposition of tariffs, particularly those proposed by the U.S. on Chinese imports, can have domestic and international economic consequences. 

• Increased Domestic Prices: Tariffs raise the cost of imported goods, leading to higher prices for U.S. consumers. This can contribute to domestic inflation, especially if tariffs are applied broadly across consumer goods.
• Impact on Trade Deficit: While tariffs may help reduce the trade deficit by discouraging imports, they can also lead to a rise in domestic production costs, which might not fully offset the increased prices for consumers.
• Shifts in Consumption: Tariffs may shift consumer preferences away from imported goods towards domestically produced items. This could boost local industries and potentially increase domestic supply, helping to moderate inflation if production meets demand.
• Global Trade Relations: The introduction of tariffs can provoke retaliatory measures from affected countries, leading to trade wars that can disrupt global supply chains and negatively impact international trade dynamics.

How might China respond to increased tariffs?

• Retaliatory Tariffs: Historically, China has imposed tariffs on U.S. goods in response to American tariffs. This could include targeting products from politically sensitive regions or sectors in the U.S. to maximize political impact.
• Currency Manipulation: China may allow its currency, the yuan, to depreciate, making its exports cheaper and counteracting the effects of U.S. tariffs.
• Increased Domestic Support: The Chinese government could implement fiscal stimulus measures to bolster domestic industries affected by U.S. tariffs, including subsidies for exporters and incentives for local production.
• Diversification of Trade Partners: China might further diversify its trade by strengthening ties with other countries and participating in regional trade agreements that exclude the U.S., reducing its reliance on American markets.

Do tariffs achieve their intended goals?

• Trade Balance Improvement: While tariffs are designed to improve the trade balance by reducing imports, their success is contingent upon consumer behaviour and whether domestic producers can meet demand without significant price increases.
• Political Ramifications: Retaliatory actions from China can undermine the intended benefits of tariffs, leading to a cycle of escalation that may harm both economies. The political fallout from these actions can also influence U.S. domestic politics, particularly if key industries are adversely affected.
• Long-Term Economic Impact: The long-term economic impact may be limited if countries like China successfully adapt through measures such as currency adjustments or finding alternative markets for their goods.

Way forward: 

• Strengthen Manufacturing and Exports: Enhance domestic production capabilities through schemes like PLI and focus on exporting goods demanded by the U.S., such as electronics, textiles, and pharmaceuticals.
• Attract Global Investments: Improve ease of doing business, offer tax incentives, and promote India as a reliable alternative to China for global supply chains and FDI inflows.

Mains PYQ:

Q The USA is facing an existential threat in the form of China, that is much more challenging than the erstwhile Soviet Union.” Explain. (UPSC IAS/2021)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now