A lot of the criticism of Trump’s trade war tactics with China is based on a misunderstanding of the dynamics of global trade and global supply chains. When the U.S. imports goods from China and then imposes a tariff, the analysts simply multiply the quantity of goods by the size of the tariff and proclaim on happy-talk TV that the “cost” of the tariffs to U.S. consumers will be the result of that multiplication.

This method is badly flawed in several ways. The first problem is that the tariffs may not be passed along to consumers, especially in a world of low inflation. Tariff costs may be absorbed by the importers (resulting in lower margins) or pushed back to the suppliers (resulting in reduced profits) and not passed to consumers. The actual result is likely to be some combination of all three effects, but the impact on consumers is still far less than the talking heads estimate.

The second and more serious problem for Chinese exports, as explained in this article, is that U.S. importers will change the source of their imports from China to another jurisdiction that does not suffer from high U.S. tariffs.

The article describes how Costco, which faces stiff competition from Amazon and Walmart, is already taking steps in this direction. Vietnam is a likely source for manufactured goods currently produced by China. The problem with this kind of resourcing is that once the U.S. importers abandon China, they will not come back.

This is one of the strongest levers the U.S. holds in the U.S.-China trade war and one reason why China is desperately seeking a solution that will end the war quickly.

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