U.S. small businesses and the overall economy have benefited tremendously from the tax and regulatory relief implemented by Congress and the Trump administration. Unfortunately, President Trump’s trade policies, including a mounting trade war with China featuring higher tariffs, work against enhanced growth and opportunity.
Argus Media recently summarized the state of trade policy between China and the U.S.: “The latest, third round of U.S. tariffs and Chinese counter-tariffs went into effect on 24 September. The U.S. tariffs now cover about half of overall imports from China, and the U.S. administration has a fourth round of tariffs ‘ready to go’ on the remaining $267 bn/yr of imports. China has imposed tariffs on around $110bn/yr of products from the U.S., equivalent to 70 percent of total imports from the country.”
Make no mistake, this very much is a small business issue. For example, exporting to China largely is about small and mid-size enterprise. Among U.S. employer firms exporting to China (based on U.S. Census Bureau data), 53.8 percent have fewer than 20 employees, 68.7 percent fewer than 50 employees, 78.4 percent less than 100 workers and 92.1 percent fewer than 500 employees.
The story is similar when it comes to U.S. firms dealing with imports from China, with 43.3 percent having fewer than 20 employees, 55.7 percent fewer than 50 employees, 65.3 percent less than 100 workers and 83.0 percent fewer than 500 employees.
For good measure, it must be kept in mind that more than 55 percent of overall U.S. imports ranks as inputs for U.S. businesses. In addition, China’s retaliatory measures matter, as they raise costs and reduce opportunities for U.S. small businesses and workers involved in exporting.
Trade with China, while not without real problems, must be put in proper perspective. It has been an overall net plus for the U.S. economy. Consider that U.S. goods exports to China from 2001 — the year that China was admitted to the World Trade Organization — to 2017 grew by 579 percent. And over the same period, U.S. imports from China — goods for consumers, and intermediate and capital goods for businesses, including for small businesses — grew by 394 percent. That’s strong growth — far outdistancing the rise in overall U.S. trade and economic growth.
Much of this is being jeopardized by the trade policies of the Trump administration as it relates to China. Small businesses operate on thin margins, relying on predictable pricing and cash flow to operate. When imports and exports are threatened, costs rise and small businesses tend to suffer most.
President Trump and his administration need to expand their pro-small business, pro-growth thinking from the areas of taxes and regulations to trade policy. The Tax Cuts and Jobs Act, passed in late 2017, lowered the corporate tax rate and made American businesses more competitive.
The legislation was applauded by small and large businesses alike, and it enhanced incentives for investment and innovation, which feed productivity, income and job growth. Going down the path of a trade war with China stand at odds with such policies and achievements. After all, tariffs are another name for taxes.
Again, there are problems when it comes to China, including its disregard for property rights. But that’s not just a problem for U.S. entrepreneurs and businesses seeking to do business in China; it’s a major problem for China itself if it truly wants to fully move from being a low-cost producer to a more advanced economy. Property rights, after all, serve as a foundational requirement for such development. In turn, the United States wants to see other nations, including China, grow and develop, as that expands opportunities for all.
In testimony earlier this year before the U.S. House Committee on Small Business, I pointed out: “Rather than raising costs to trade with China, the best path forward would be to enter into serious discussions that lay the groundwork for a China-U.S. free trade agreement. Through that process, the U.S. would be able to constructively advance the cause for open markets and property rights in China. And a free trade accord between the world’s two largest economies would considerably expand opportunities for entrepreneurs, small businesses and workers in both nations.”
Still, there is some potential good news on the trade front as the administration has announced it is seeking trade agreements with Japan, the European Union and Great Britain. This would open opportunities for our small businesses in appealing markets and solidify relationships with these important U.S. allies. The United States re-engaging as a global leader of free trade would boost U.S. economic growth for the long term and boost entrepreneurship, which has been lagging. Advancing free trade is the approach the United States needs to pursue with China as well.
• Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.