Difficult to count the true cost of a trade war

There is an African proverb that says that when elephants fight, the grass is hit the hardest.

In the last 10 days the business news has been peppered with reports about the escalation of a US-China trade war. 

The bottom line is that the US is imposing new tariffs, or import charges, on items coming into the US from China, with the Chinese reciprocating.

On the face of it, additional import charges mean an additional burden for the eventual purchaser of the goods. In many instances, the impact of a tariff is clear. 

An additional charge imposed say, on a piece of beef being imported, inevitably means that the piece of beef will cost the consumer more. 

Often, however, the impact of the imposition of tariffs on a day-to-day basis is not nearly so clear-cut.

President Trump is claiming that the burden of the new US tariff regime will be felt most by the Chinese, while at the same time some of his closest economic advisers are claiming that the tariffs will actually be borne by American consumers. 

Ironically, both might be partly right.

Tariffs are a protectionist measure, designed to foster domestic industry and commerce. 

Manufacturers from foreign countries exporting under a tariff regime will be faced with a levy which means that the domestic product they are competing with is cheaper.

To counter this, such exporting manufacturers may decide to live with lower profit margins, or try to achieve efficiencies of scale or other savings so that, despite tariffs, their goods remain competitive in the export market.

In that scenario there is no impact on the consumer and this seems to be the Trump assumption.

On the other hand, if the tariffs are so high, and in some cases the US tariffs on Chinese goods are as much as 25% of the value, the imposition of tariffs effectively shuts out foreign competition. 

That allows domestic suppliers to hike their prices but can also reduce the choices available to consumers. In that scenario, the consumer does lose out. 

But because a tariff is, at heart, a form of tax, nothing is that straightforward. Trade war outcomes are no longer entirely predictable and there are two reasons for that.

The first is the complexity of products which are purchased by consumers. 

Almost any consumer item you can think of is made up of multiple components, some of which are manufactured using components and raw materials, which - in turn - are sourced from different countries. 

To tackle this, international customs codes try to apply what are called rules of origin to work out the most appropriate tariff to be applied on import.

A relatively small change to the makeup of a finished item, or even splitting an item into component parts, for instance supplying a phone but delivering its software separately, perhaps by download, can have a dramatic impact on the tariff to be charged.

Secondly, the way we purchase goods has changed dramatically. 

The old manufacturer, importer, wholesaler, retailer model has, in many respects, been turned on its head with the advent of e-commerce.

In many instances a consumer is now able to buy and arrange an import directly from a manufacturer rather than via the old commercial model. 

This makes the tracking of price changes and their impact on consumers very difficult to monitor consistently. Therefore, estimates of the impact of a trade war can be skewed. 

When elephants fight the consequences are obvious. 

It’s far harder to predict who will be the hardest hit in the trade war between China and the US.

Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland

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