“Deadweight” losses are the extra costs
producers and consumers pay for goods
they used to purchase from China but
now buy from other countries.14
FORTUNE.COM // SEPTEMBER 2019
sneakers to steel, Trump
is inflicting a heavy price
that could plunge the
country into recession.
There are two is-
sues: First, the way the
President has structured
his tariffs is creating what
economists refer to as
“deadweight” losses that
threaten GDP growth
(more on that later). Sec-
ond, China has cannily
avoided such pitfalls by
being far more judicious
in its tariff strategy.
Take Trump’s latest
round of tariffs, slated to
take effect at the start of
September. Those new
duties target for the first
time a wide swath ofconsumer goods, some
$300 billion in toys,
footwear, apparel, and
some tech gear (Trump
has delayed some levies
till December). The new
categories will be hit with
tariffs just in time for
holiday shopping.
According to a recent
study from researchers
at the New York Federal
Reserve, Columbia, and
Prince ton, in 2018, U.S.
domestic prices rose
“one-to-one with tariffs
levied in that year.” And
contrary to what some
Trump economists
have claimed, “Chinese
exporters did not reducetheir prices.”
That’s leading to what
Stephen Redding, the
Princeton economist who
coauthored the study,
calls “deadweight” losses.
Those are the extra
costs that producers
incur—and customers
pay—for goods they used
to purchase from China
but now buy from third
countries, where the U.S.
gets no tariff revenue.
For example, GoPro
is shifting most of its
U.S.-bound production
from China to Mexico by
mid-2019, while Hasbro
is moving much of its
sourcing of toys sold
stateside from China toVietnam and India, cit-
ing Trump’s tariffs. Levi
Strauss, Gap, and shoe
company Steve Mad-
den have all announced
plans to buy less from
China and more from
nations such as Vietnam
and Bangladesh.
Here’s the rub: When
those companies were
producing in China and
paying a 25% tariff on
goods, they typically add-
ed that charge to their
prices. The U.S. govern-
ment collected that levy
and could cycle it into
the economy by fund-
ing anything from aid to
farmers (some $12 bil-lion in 2018) to military
salaries to highways. But
as tariffs get bigger and
bigger, the incentive rises
for companies to shift
from Chinese suppliers
to other countries where
they might be overpay-
ing by 10%, 15%, or even
20%. “Now, they’re shift-
ing to producers who are
costlier and less efficient,
hindering the efficiency
of the U.S. economy,”
says Chad Bown, an
economist at the Peter-
son Institute.
How big is the dead-
weight burden? The N.Y.
Fed study calculated that
every U.S. household is
paying an extra $620 a
year. That number could
double if Trump raises
tariffs on all Chinese
imports to 25%. The
cumulative hit to GDP,
when you include the
drop in exports to China,
could be $200 billion,
says Weijian Shan, the
Ph.D. economist who
heads Hong Kong pri-
vate equity giant PAG.
That’s a gigantic
number. After expand-
ing at 2.9% last year,
GDP growth decelerated
to 2.1% in the second
quarter, and the Con-
gressional Budget Office
predicts an expansion
of just 1.7% in 2020.
At that rate, real GDP
would increase less
than $400 billion next
year, so a $200 billion
drag would cut growth
in half, to around 1%
or less. A drop that size
means tepid or zero job
creation, flagging invest-
ment, and slumpingprofits—and raises the
odds that the economy
could tip into recession.
Meanwhile, China
too has paid a price—
albeit a smaller one.
The IMF predicts GDP
expansion of just 6.2%
this year, the lowest
number since 1990,
and 6.0% in 2020. But
instead of slapping one-
size-fits-all tariffs across
vast categories of goods,
Xi Jinping is targeting
only products the coun-
try can’t buy at compa-
rable cost elsewhere.
For example, China has
imposed a 28% levy on
100% of the $13.9 bil-
lion in soybeans it used
to buy from the U.S.
because it can acquire
them at about the same
price from Brazil and
Argentina. But it can’t
find good substitutes
for American-made
aircraft, drugs, or cars,
so China has kept tariffs
on those products near
pre–trade war levels.
Duties on U.S. phar-
maceuticals and planes
remain below 3%.
At the same time,
China has lowered
tariffs on every other
country. So in most cat-
egories, U.S. exporters
now face higher tariffs
and tougher competi-
tion from Canadian,
European, and Japanese
suppliers.
Crunch the numbers,
and it’s hard to come to
any other conclusion:
In the trade war that
will chart America’s
economic future, China
is winning.