How Trump's tariffs hurt China

Tyler Cowen:

...
To see why the full picture is more complicated, let’s say the U.S. slaps tariffs on the industrial inputs (whether materials or labor) it is buying from China. It is easy to see the immediate chain of higher costs for the U.S. businesses translating into higher prices for U.S. consumers, and that is what the afore-mentioned studies are picking up. But keep in mind China won’t be supplying those inputs forever, especially if the tariffs remain. Within a few years, a country such as Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary, but the lost business in China will be permanent. Furthermore, the medium-term adjustment will have the effect of making China’s main competitors better exporters.

Obviously, no final long-run estimates are possible right now. But it is quite plausible that China will bear the larger costs here, not the U.S.

Another risk for China is this: As its access to U.S. markets becomes more difficult, China may be tempted to look to Europe. It remains to be seen whether the European Union will adopt additional protectionist measures, but China must consider that the possibility is more than zero.

To understand another feature of the longer-term perspective, consider that the impact of tariffs can be felt in at least two ways. In highly competitive markets, prices have to match costs, and so a cost-boosting tariff really does translate into higher consumer prices. (This is the case with many of the recent U.S. tariffs on China.) But for profitable branded goods, the economics aren’t the same. If the U.S. puts higher tariffs on Mercedes-Benz, for example, the prices of those cars will still exceed their costs of production. Mercedes, wishing to keep some of its strong market position, will probably decide to suffer some of the cost of the tariffs in the form of lower profits, rather than passing them along to its customers.

China has prominent brands as well, be it Huawei in electronics or other firms in exotic food products, and over time it aspires to climb the value chain and sell more branded goods to Americans. In fact China has an industrial policy whose goal is to be competitive in these and other areas. Tariffs will limit profits for these companies and prevent Chinese products from achieving full economies of scale. So this preemptive tariff strike will hurt the Chinese economy in the future, even if it doesn’t yet show up in the numbers.

There is also a broader reason why a trade war with the U.S. hurts China, and this gets to an important point with trade agreements more generally. A U.S. trade agreement with China would (if enforceable) certify China as a place where foreigners can invest and be protected against espionage, intellectual property theft and unfair legal treatment. That prospect of certification is now suspended. That makes investing in China less desirable for many multinationals, not just U.S. ones. That, in turn, limits Chinese domestic wages as well as long-term learning and technology transfer. A U.S. certification of China might even boost Chinese domestic investment, but again that is now off the table.
...

The tariffs China is imposing appear to be aimed mainly at imported fossil fuels and US agricultural products.  In the case of oil and gas, with turmoil in the markets for some producers, the US will likely find alternative buyers.  As for agricultural products, it appears the Trump administration is going to buy some of the crops and I think there will be a search for alternative markets there too.   So far, I have seen little to indicate that US consumers have noticed them so far.