In early 2018, the Trump Administration imposed hefty tariffs of up to 25% on products imported from China, including things such as televisions, aircraft parts, and medical equipment, in an effort to lessen the current trade deficit with China. The question now on everyone’s mind is, “How will it affect me?”
Trade War with China
What’s a trade war? It’s just as it sounds; countries battling one another using the goods that countries import and export. Typically, when one country imposes taxes, or tariffs, on another, the other country responds with its own tariffs, and it escalates from there, hence the term “trade war.” Tariffs are placed on products made in other countries with the intent of encouraging people to buy locally by making the use of imports more expensive, thus reducing the trade deficit with that country. In 2017, the deficit with China hit a whopping $566 billion.
As dire as that sounds, trade deficits aren’t always a negative thing. The U.S. is a service-driven country. In fact, services make up the vast majority of America’s economy, resulting in $778 billion in exports in 2017 alone. China’s economy is dominated by exports of goods not services, so any tariffs have a big impact on that country.
For the most part, the U.S. participates in free trade. Free trade is when there are few to no tariffs on goods traded between countries, meaning we can buy cheaper products from wherever we please. The problem with free trade is that fewer people will buy locally because countries that don’t pay a fair living wage can sell products much cheaper. Rules and laws on minimum wage and safety practices exist in this country, many of which other countries simply don’t have. This, unfortunately, puts America at a disadvantage when it comes to free trade.
The reason for tariffs on China was twofold. The first was to lessen the trade deficit to make it a more level playing field, but the second came after getting a glimpse into China’s trade practices that include only allowing companies into the Chinese markets if they give the Chinese state their technology secrets. China is gearing itself up to be a leader in technology innovation and is doing so by collecting research and technology unfairly from companies wanting to do business there. With China being such a huge market, few are willing to walk away.
With Chinese goods more expensive to buy, Americans will turn to American companies for these products and China will lose money, encouraging China to renegotiate its trade practices.
The hope is that start-ups and established companies will see the tariffs as an opportunity and that it’ll kickstart a renewal of manufacturing in the U.S., which has been steadily moving to Mexico and overseas over the last few decades in search of cheap labor and fewer taxes.
The Tariffs
The tariffs began in February with tariffs on solar panels and washing machines. In March, Trump escalated things by imposing 25% tariffs on all steel imports and 10% tariffs on aluminum. This means less steel coming in from other countries, which will drive up the price of steel in the U.S. While this may be beneficial to American steel manufacturers, prices will rise on everything that uses steel or aluminum in production, including cars, airplane parts, and soda in aluminum cans. The move was an issue for China, which in turn imposed retaliatory tariffs of more than $3 billion on more than 106 U.S. products, including fruits, nuts, wine, and pork. The U.S. followed with a hit to China’s tech industry in an effort to stop the stealing of intellectual property and considered another $100 billion in tariffs. While deals were ongoing, with China agreeing to buy additional American products such as automobiles and coal, the negotiations broke down in June, prompting Trump to threaten another $200 billion in tariffs.
The implementation of tariffs is hardly a new tactic. In fact, before 1900, tariffs with other countries were the norm. There have also been many trade wars throughout history. In the ’80s, President Reagan imposed high tariffs on Japanese imports; President George W. Bush imposed tariffs on steel in 2002; and President Obama slapped tariffs on Chinese tires.
One of the most impactful trade wars occurred after the Stock Market Collapse of 1929. The Smoot-Hawley Tariff Act enacted on June 17, 1930, raised tariffs on imports in order to protect farmers competing with European farmers recovering after World War I. In order for the act to pass, lawmakers lobbied for tariffs on other business sectors and won. Many believe that the tariffs worsened the Great Depression, and in 1934, the Reciprocal Trade Agreements Act was signed into law, which reduced the tariffs and created more amicable trade agreements with Europe.
The Far-reaching Impact
Beginning on August 20, there were six days of public hearings on the impact that further tariffs would have in U.S. markets. The Trade Act of 1974 requires these hearings take place in order for companies to let their concerns be known in the public arena. Originally, three days of hearings were planned, but it was expanded to six days. Many representatives from industries affected directly or indirectly by the trade war spoke about the detrimental impact they were experiencing.
Steel and Aluminum
The tariffs on steel and aluminum may give steel mills in the U.S. a boost, but the products made from these will become more expensive, which includes everything from automobiles to soups and sodas that use them for packaging. Companies that rely on steel for parts for their products – and are surviving on thin margins as it is – may not make it.
Liquefied Natural Gas
China has imposed a 25% retaliatory tariff on liquefied natural gas, which has hurt the industry. Already affected by the tariffs on steel, this emerging industry is facing big losses. It was believed that LNG would be spared, as China is the second largest importer with its need for cleaner energy to combat its smog and pollution problem, but it wasn’t.
Fitness Trackers
FitBit says the tariffs would cause it to raise prices, lay off workers, and cut back on research.
Luxury Handbags
Makers of handbags already have a problem with worldwide counterfeiting. The tariffs would cause them to raise their prices and turn more people toward purchasing counterfeit bags.
Childcare Products
Many products, such as breast pumps and child safety products, use materials from China during the manufacturing process, or they’re made entirely in China. These companies testified that the tariffs would drive their prices up, making items unaffordable for low-income families.
Anything with Down
China is the only supplier of duck and goose feathers because it has the biggest duck and goose industry, of which down is a by-product.
Leather Furniture
Currently in the U.S., there are no manufacturers of upholstery leather, which means there’s nowhere for manufacturers of leather furniture to turn for materials other than outside the country. This means their only choice is to pay the tariffs and pass the cost on to American consumers.
Appliances
Tariffs on their components or on finished products will impact small and medium companies the most because they won’t be able to incur the extra production cost without passing it on to consumers.
Recreational Boats
Over 95% are made and sold in the U.S., but they rely upon China for parts and raw materials.
Bicycles
Over 90% of all bikes or their components are made in China.
Semiconductors
Tariffs on semiconductors found in many wireless devices will drive up tech prices.
Televisions
In early August, a television manufacturer in South Carolina laid off 126 workers, nearly its entire workforce, because of the tariffs. It kept only a few, hoping to ride out the trade war.
Seafood
On the latest list of tariffs on $200 billion worth of Chinese products is seafood. This has made fish buyers from China nervous, and they’ve already begun holding back on the purchase of fish from Alaska.
Soybeans
Half of all U.S. soybean crops are sold to China. In April, China canceled all contracts with soybean growers in the U. S. This caused soybean prices to drop dramatically due to oversupply, which may be good news to consumers of soybeans but not to growers.
Motorcycles
Harley Davidson is choosing to move operations out of the country because retaliatory tariffs are making it too expensive for them to continue operations domestically.
Products such as lobsters, cheeses, nails, lawn equipment, Kentucky bourbon, Levi’s, cotton, airplanes, pork, and salmon are seeing big losses due to the retaliation tariffs or loss of the Chinese market altogether.
What It Means to You
If the current administration continues on in its current path, 50% of all products imported from China will have tariffs. The majority of the tariffs are imposed on materials used to make other products, so manufacturers will have to raise prices whether they buy the materials from China with the tariffs or buy locally, which will cost more too. Either way, companies will be forced to pass the cost on to consumers, or it will cause them to cut jobs or move out of the country. Most likely, we’ll be seeing increases on most of the things we buy, and higher prices means a decrease in consumer spending and an increase in inflation. Retailers may try to lessen the blow by increasing prices a little across the board instead of those products directly affected, so we may see a rise in most of the things we buy.
According to a new study by the National Retail Federation, the tariffs will cost American consumers more than $6 billion a year in added costs on furniture and luggage alone. The added cost on all the products included on the tariff lists may be astronomical.
The Smoot-Hawley Tariffs caused an 8% drop in the Gross National Income, and experts predict it may drop further, but only 2% over the next three years. The good news is that central bankers will have learned from the past and can avoid the moves that contributed to the Great Depression. However, there’s not a lot they can do to avoid inflation, a slowing of economic growth, and increases in unemployment. Many companies have already begun laying off employees to offset profit losses.
Even if Trump puts tariffs on all of China’s imports, that would only be about 25% of all the goods currently imported by the U.S. worldwide. This is less than the third of imports that were included in Smoot-Hawley in 1930. The Smoot-Hawley tariffs were not a percentage of the cost as today’s tariffs are; they were a specified amount of money. This meant that as prices for goods plummeted during the Great Depression, tariffs were still high; in some cases, they were higher than the original cost of the product itself.
What’s Next?
With both sides threatening further tariffs, economists are worried. Neither Trump nor China shows signs of backing down. Some worry that because China can only retaliate so much due to the fact that we export much less than we import, they’ll begin targeting America’s reliance upon the service industry by limiting travel to the U.S. This will have a huge impact on American hotels, restaurants, and tourist attractions.
Although many people support doing something to address China’s unfair trade practices, most worry the tariffs cut too far and wide. The agricultural industry has been one of the hardest industries hit, and on August 27, Trump announced $4.7 billion in subsidies to relieve farmers who are losing money due to the trade war, with more help most likely on the way later in the fall, if needed.
Congress is also looking for ways to mitigate the effects of the trade war on American businesses and consumers by allowing greater access to the Trade Adjustment Assistance Program, which provides aid to those who’ve lost work due to increased imports. If the tariffs are affecting you, it may be time to start seriously considering a budget.
If Congress chooses not to step in, it may be up to the World Trade Organization to sort things out, as eight countries have already filed formal complaints, including several U.S. allies such as Canada and the European Union, and countries other than China are threatening retaliatory actions.