CICC: Trump's two goals are difficult to achieve

According to the Zhitong Finance APP, CICC released a research report stating that the Trump administration's attempt to narrow the U.S. trade deficit and bring manufacturing back through increased tariffs is difficult to achieve through tariffs.

First, tariffs are unlikely to narrow the U.S. trade deficit. Theoretically, raising tariffs does not necessarily reduce the deficit (or increase the surplus). According to Lerner's symmetry theorem, taxing imports is equivalent to taxing domestic exports. Historically, after the McKinley Tariff Act of 1890, the U.S. surplus rose for a time, but after the Smoot-Hawley Tariff Act of 1930, the U.S. surplus declined and even turned into a deficit, illustrating the complex relationship between tariffs and trade surpluses. In 1890, the U.S. was still in the relatively early stages of industrialization and faced competition from Britain, so tariffs could protect its nascent industries. By the time the Smoot-Hawley Tariff Act was enacted in 1930, the U.S. had surpassed Britain in international standing and its share of global exports had also exceeded that of Britain. For a large country, tariffs may simultaneously lead to declines in both imports and exports, and the trade deficit may not necessarily narrow.

Tariffs are unlikely to bring manufacturing back to the U.S. In recent years, U.S. manufacturing investment accelerated for a time but did not sustain; recently, new manufacturing investments and short-term investment plans have declined. China's exports of intermediate goods to the U.S. are far lower than those to emerging markets, reflecting the slow pace of U.S. manufacturing return. The global manufacturing supply chain is more adjusted to emerging market countries rather than the U.S. Correspondingly, the length of the supply chain between China and the U.S. has increased. The global supply chain is highly dependent on China, and whether in terms of the number and quality of laborers or willingness to work, the return of U.S. manufacturing will face labor shortages. High manufacturing costs in the U.S. also pose challenges for the return of manufacturing. Additionally, compared to ASEAN, China has advantages in infrastructure, land costs, utility expenses, and public safety, aside from labor costs and tax rates.

The U.S. faces recession risks. After the implementation of the Trump administration's tariff policy, more than half of U.S. citizens expressed disapproval, and the negative impacts of the tariff policy on businesses and consumers have begun to emerge. The growth rate of business imports has started to rebound, and input prices and sales prices have begun to rise; consumer confidence indices have declined, and inflation expectations for consumption have rapidly increased. The U.S. fiscal deficit remains high, and the debt issue has not been resolved, which may exacerbate financial market risks under tariff disturbances. Overall, Trump's tariffs may have a stagflationary impact on the U.S., increasing the risk of recession. In addition to the "stagflation" risk, Trump's combination of tax cuts, spending reductions, and tariffs may harm most American households, with a greater impact on low-income groups, exacerbating internal imbalances in the U.S.

In fact, from an economic perspective, the U.S. does not have a particularly prominent external imbalance issue, but there are serious internal distribution problems. The U.S. has a trade deficit in goods but a surplus in services. In 2024, the U.S. goods trade deficit is projected to account for 4.2% of GDP, while the services trade surplus is expected to account for 1.0% of GDP, resulting in a total deficit of 3.2%. Particularly, against the backdrop of negative net foreign investment in the U.S., the net investment returns from foreign investments have performed well. CICC believes that the internal distribution problem in the U.S. is quite serious and requires internal reforms to reduce the wealth gap rather than increasing tariffs, but the Trump administration's approach may exacerbate internal income disparities