The escalation of tariffs between the United States and China has alarmed investors, CEOs and economists. It is a costly disruption in global supply chains. In the long run, it is likely to ratchet up prices for consumers and businesses. It may also depress economic growth and raise interest rates, dampening investment and consumption.
Trump imposed tariffs on hundreds of billions of dollars worth of Chinese goods in 2018. At the time, he claimed that the levies would decrease the trade deficit with China, bring back manufacturing jobs to the United States and force China to reform its trade practices, including intellectual property theft. These claims have not materialized. In fact, since the imposition of the tariffs, trade with China has fallen. However, trade with third countries has increased. This reshuffle of production has pushed up input costs for manufacturers and made them less competitive globally.
Until Geneva, the US and China seemed on the verge of an effective embargo of bilateral trade. However, the Geneva talks allowed both nations to de-escalate their retaliatory tariffs and avoid a collapse in trade.
Although it is not yet clear whether the two sides will reach an agreement, both have reason to do so. Washington wants to generate customs revenue to partly compensate for Republican-inspired tax cuts and to offset the cost of the tariffs. Beijing, meanwhile, has taken steps to reduce its trade surplus, which is a major contributor to its current account deficit.
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