The Graph That Reveals the Heart of the US-China Trade War

The US consumes twice as much as it produces, and the situation is reversed in China. One of the goals of the US trade war is to change this situation. However, it is clear that the biggest losers in the tariff war are consumers, who end up paying higher prices.

Deutsche Bank’s research team recently published a chart that reveals the crux of the trade war – industrial production is concentrated in China, and the country consumes almost three times less than it produces. The US, on the other hand, consumes twice as much as it produces. This has created a huge trade deficit for the US (imports are greater than exports), while China has a surplus.

The volume of trade between the US and China was $582 billion last year

The US exported $143 billion worth of goods to China, while importing $439 billion. Thus, the US trade balance with China last year was $295 billion in deficit.

This imbalance is one of the main motives for starting a trade war. The new US administration aims to bring manufacturing back home. The US accounts for 15 percent of the added value created in the global industrial sector, while China accounts for 32 percent. The US accounts for 29 percent of global consumption, while China accounts for 12 percent. The US accounts for 24 percent of the global economy (GDP), while China accounts for 19 percent.

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Furthermore, since building up its industrial production, China has not moved towards a consumer-oriented economy. Instead, it has focused on improving its highly developed and technology-based industrial capabilities.

US President Donald Trump has said: “Make your products in the US and you won’t pay any tariffs.” This indicates that one of the main goals of the trade war is to bring manufacturing back to the United States.

Deutsche Bank research strategist Jim Reid said that a international trade war with China is likely to be longer-lasting than, say, Mexico or Canada. Markets are not ready for such a long-term confrontation, he said.

How Do Tariffs Affect Inflation?

But how do tariffs affect inflation? So far, a 10 percent tariff on Chinese goods has effectively gone into effect. This means that all U.S. companies and individuals who import goods from China will have to pay a 10 percent tax on them.

Let’s say a US company imports $100,000 worth of components from China to make a product. If you add in tariffs, the cost rises to $110,000. The question immediately arises: who pays the additional cost? Of course, the tariff is paid directly by the company that imported the goods. In reality, however, tariffs mean that the company’s costs increase and, if prices are left the same, the profit margin decreases (or, in the worst case, the business becomes unprofitable).

Of course, there is also the possibility that if profit margins are sufficient, the company will not raise prices. In this case, profitability simply decreases. Another possibility is that part of the price increase is absorbed by the company and part by the consumer, meaning that only part of the tariffs paid are reflected in the price increase of the product.

A third possibility is that the cost of tariffs is passed on in full to the consumer

Which path a company chooses depends on the type of product and how much the price increase affects demand. If the price increase is too large, the consumer may look for a cheaper alternative or not make the purchase at all.

For example, the United States imports about 60 percent of its fresh fruit, and half of that comes from Mexico, where the imposition of 25 percent tariffs was postponed by 30 days in early February. Fruit has a shorter shelf life than other products, making it more expensive and difficult to import from other parts of the world.

Because the product spoils relatively quickly and grocery store margins are very tight, it is likely that a large part of the tariffs will be passed on to consumers. The situation is a little different for products with a long shelf life, as they are easier to transport and stock from elsewhere.

Changing the Location of Production is Costly

If a manufacturing company decides to bring production back home due to tariffs, there are several costs involved. First, it is expensive to close factories and production facilities in other countries, and second, it takes capital to build new factories at home. Also, production costs in the US are likely to be higher, which further increases the cost of products.

Take car manufacturers, for example. In most cases, it is much cheaper to manufacture car parts in China or Mexico, which is also why a large part of Western companies’ production has been moved mainly to Asia.

Thus, tariffs are inherently inflationary and raise prices primarily for domestic consumers. However, they can be an effective strategy to increase tax revenues and bring manufacturing and jobs back to the country.

Key Takeaways

The US-China trade war highlights a fundamental imbalance in global trade – China’s dominance in industrial production versus America’s high level of consumption. While the US aims to reduce its trade deficit and bring manufacturing back home, the reality is far more complex. Tariffs, though intended as a tool for economic realignment, ultimately increase costs for businesses and consumers, fuelling inflation and disrupting supply chains.

Shifting production away from China is neither quick nor cheap, as businesses must weigh the costs of relocation against potential long-term benefits of economic growth. Meanwhile, China continues to strengthen its industrial and technological sectors rather than pivoting toward a consumer-driven economy.

As a result, the trade war is unlikely to be a short-lived dispute but rather a prolonged economic battle with global consequences. Whether the US can successfully reindustrialize while managing the inflationary pressures of tariffs remains an open question, but for now, the biggest burden falls on consumers who face higher prices in an already uncertain economic landscape.