Assessing the Costs of Tariffs on the US ICT Industry: Modeling US China Tariffs

In recent years both China and the US have moved beyond threats to start closing doors to one another in high technology. This broad trend of technology decoupling is advancing in many areas, from ongoing tariffs to new and strengthened investment restrictions. In 2016 Rhodium Group conducted a study called “Preventing Deglobalization: An Economic and Security Argument for Free Trade and Investment in ICT,” which estimated the costs to the Chinese economy of shutting down information and communications technology (ICT) trade with the world. We found that Beijing’s ICT “nativization” would deliver massive economic and productivity losses for China for years to come.

Now, in light of the Trump administration’s intensification of trade and investment barriers against China, we have turned the focus of our update to the 2016 study to the costs of US ICT deglobalization for the US economy. In a new report titled “Assessing the Cost of Tariffs on the US ICT Competitiveness: Modeling US China Tariffs,” published in partnership with the United States Chamber of Commerce, we offer a quantitative assessment of the impact of barriers to US-China ICT trade. As a basis for our assessments, we simulate tariff escalation scenarios modeled after the US Section 301 case because that action disproportionately targeted Chinese exports of ICT-related goods to the US. Even if some of those tariffs are lifted in a temporary cessation of trade tensions in coming weeks, US barriers to tech trade and investment with China are likely to remain in place if not intensify. For that reason, we re-engaged our earlier work in an effort to help policymakers and the business community understand the potential economic ramifications of technology decoupling from China.

Our key findings include:

US GDP would face $1 trillion in cumulative losses within ten years across all tariff escalation scenarios. The costs of such action are unambiguous: bilateral tariffs result in lower GDP, employment, investment, and trade for the US. Tariffs raise import and export prices, resulting in higher costs for US consumers and businesses, lower trade both ways, and less efficient resource allocation. In the five years after tariffs are implemented, average annual US GDP would fall $64 billion to $91 billion (0.3% to 0.5%) short of baseline potential, for a cumulative hit ranging from $318 billion to $450 billion (1.5% to 2.2%) over that period. Even if the latest Section 301 tariffs on $260 billion in two-way trade are lifted in a near-term deal, US GDP would still be $50 billion (0.3%) lower than projected by the end of 2019.

Bilateral tariff escalation erodes US ICT export competitiveness. US ICT merchandise trade takes a significant hit, reflecting the importance of globalized supply chains to American productivity and competitiveness. US tariffs raise prices for one-third of its ICT imports from China—equivalent to nearly one-fifth of its total ICT imports from the world. As a result, within five years US ICT merchandise imports would fall by 9% to 10% annually, and exports by 14% to 20%.

Tariffs undermine the critical role of US ICT services in facilitating all goods trade, and especially within globalized supply chains. Services sectors contribute 14% of the value-added in US ICT goods exports, 30% in all US manufacturing exports, and more than 60% in total US ICT industry exports. The negative impact on US ICT services exports grows more severe over time and equates to a significant missed opportunity for the US ICT services industry.

Decoupling ICT trade with China does not bring much ICT manufacturing back to the US. Tariffs reroute global ICT supply chains to regional supply chains: China-based ICT manufacturing takes the biggest hit, while production shifts to Canada, Mexico, Latin America, and the rest of East Asia. Domestic ICT production in the US rises only marginally to meet the gap in domestic demand left by reduced imports.

China and the US—in that order—suffer the biggest hits to potential GDP growth, while the rest of the world benefits from diverted trade and investment. US-China tech decoupling leads to global GDP averaging 0.1% to 0.2% ($100 billion to $150 billion) lower than baseline each year over the first five years after tariffs implemented. Within two years, GDP in the rest of the world is higher than trend projections, with countries in regional supply chains—Canada and Mexico, and to a lesser extent East Asia ex-China—benefitting most.

A clearer understanding of the traditional economic welfare effects of proposed trade policy action is essential, even if—or perhaps especially if—larger questions of national security and competition are at issue. The impacts of trade policy actions already at an advanced stage are not well understood, and the real implications have not been subject to sufficient public debate. The increased transaction costs imposed by tariffs, the reduced economies of scale and scope caused by cordoning off US innovation from activity in China, and the reintroduction of political risk into the calculus of firms and individuals will have profound impacts on US innovation and competitiveness which cannot be predicted.

Download the full report.