President Donald Trump’s trade battle is raging on many fronts — from Canada and Mexico, to the European Union and Japan. But in recent days, the spotlight has been shining on a conflict with one country in particular: China.
That’s because the Trump administration on Friday slapped additional tariffs on $200 billion worth of imports from the Asian nation, causing markets, economists and trade groups to panic over the prospects of slower growth and weaker demand. China announced Monday that it would retaliate with more duties on June 1, and now, the U.S. looks poised to slap levies on all remaining Chinese imports.
“It’s safe to say that we can call this a trade war,” says Clark Packard, trade policy counsel at the R Street Institute, a Washington-based think tank. “Trade watchers in Washington have been reluctant to use the expression ‘trade war’ because it conjures up sort of a back-and-forth. But with everything subject to a tariff, what the Trump administration is talking about, you really do have the world’s two largest economies going back and forth.”
The tit-for-tat nature of the U.S.-China trade war can make it inherently hard to follow. But it’s worth paying close attention, because every time there’s a tariff hike, your pocketbook is likely going to feel it.
Here’s everything you need to know about the U.S.-China trade conflict, including why it’s happening, how it came to fruition and how it could impact your wallet.
What’s a trade war, anyway?
A trade war is a conflict that has the potential to “spiral out of control,” as Packard puts it.
It starts when one country imposes quotas or taxes on a number of imports from another nation. Then, as a result, the second country retaliates, implementing similar levies on the original country. The first country typically responds again, and the cycle continues.
“It’s a series of actions that governments take against each other to restrict a foreign country’s trade,” says Bill Adams, vice president and senior economist at PNC Financial Services Group, who forecasts global economic conditions. “If there are tariffs and retaliatory tariffs and then everything else sticks to the status quo, that wouldn’t be a trade war. A trade war is when you have this intensifying cycle of restriction.”
That describes how developments have panned out on the U.S. and China trade front. The Trump administration began imposing levies in July, starting with 25 percent tariffs on a list of $34 billion worth of goods from China. The Asian nation then responded in parallel.
The conflict further ramped up in August, with the U.S. and China both imposing 25 percent levies on additional $16 billion of products from each other, bringing the total up to $50 billion.
But it didn’t stop there. An even bigger blow occurred in September, when the Trump administration announced that it was going to impose new tariffs of 10 percent on another $200 billion. On the list this time were a variety of imports, from clothing, furniture and luggage, to garlic, carrots and pistachios. Those levies would then increase to 25 percent starting on Jan. 1, 2019, officials said.
In kind, China enacted new 10 percent tariffs on an additional $60 billion worth of American goods.
Those fresh levies meant that tariffs were now on nearly half of all imports from China, according to 2017 data from the Office of the U.S. Trade Representative, which showed that China imported nearly $505 billion of goods in 2017.
But for a while, that 15 percentage point hike was taken off the books, as the U.S. and China looked to be nearing a deal. In December, Trump said he would be delaying that increase, after the two nations arrived at a trade truce.
But the rug was ripped out from underneath everyone on May 5, when Trump tweeted that those 10 percent levies would soon be increasing to 25 percent by the end of the week. The abrupt social media announcement reportedly happened after Trump was informed of Chinese officials backtracking on provisions.
Trump’s trade battles at first seemed to parallel other presidencies, but over time, this one has become more unprecedented, according to Adams.
“In previous cycles of tariffs, they tend to happen early in presidential administrations, and then as American businesses and consumers felt the cost of the tariffs, political pressure eventually eased and caused U.S. policy to reverse,” Adams says. This time around, “we’ve had ongoing rounds of tariffs on other goods from China that have broadened the scope of tariffs, so that they affect more and more of our imports with China.”
Why is the Trump administration imposing tariffs?
But tariffs don’t just come out of nowhere. They’re often a symptom of what economists call “protectionism” — that is, when a country tries to shield its domestic industries and firms from foreign competition by taxing imports.
“It’s supposed to cause American buyers of foreign products to look for sources in the United States,” Adams says.
Once this happens, Trump hopes his tariffs will bring back jobs and opportunities to the U.S. that have otherwise been going to China.
“There is no reason for the U.S. consumer to pay the tariffs,” Trump tweeted Monday. Tariffs can be “completely avoided if you buy from a non-tariffed country, or you buy the product inside the USA (the best idea). That’s zero tariffs.”
Trump often points to the China trade deficit — or the disproportionate amount of imports from the Asian nation — as a reason for the duties. China is the No. 1 trading partner with the U.S., with $659.8 billion of total goods being traded between the two countries in 2018, according to USTR data. Exports, however, totaled $120.3 billion, while imports totaled $539.5 billion. That brings the goods trade deficit with China to $419.2 billion.
“The United States has been losing, for many years, $600 to $800 billion a year on trade. With China, we lose $500 billion,” Trump said in a May 6 tweet. “Sorry, we’re not going to be doing that anymore.”
Tariffs are also often used as a “sanction,” or one country’s way of punishing another for trading practices or behaviors that a country doesn’t agree with. The thought is, if tariffs prompt business to shift their supply chains to different countries, it could hurt China’s economy — and prompt them to make key concessions.
Officials in March of 2018 released a report finding that China was conducting unfair trading practices related to technology transfer, intellectual property and innovation under Section 301 of the Trade Act of 1974. They used this as grounds for their first round of tariffs. White House officials have said that they want China to stop stealing intellectual property and other trade secrets.
“Tariffs will bring in far more wealth to our country than even a phenomenal deal of the traditional kind. Also much easier and quicker to do,” Trump said in a May 10 tweet following the tariff hike. “Tariffs will make our country much stronger, not weaker. Just sit back and watch.”
Will tariffs solve those problems?
But there’s not a lot of evidence to suggest that tariffs can solve those problems, Packard says. Trade deficits have more to do with broader macroeconomic conditions than trade policy, he says, and it’s also going to take a lot more than a tax hike to ensure China treats American companies fairly.
“Tariffs are really an outdated policy tool,” Packard says. “A lot of the trade deficit is driven by larger macroeconomic indicators and factors, like the value of currency and Federal Reserve monetary policy,” and resolving unfair trade requires “more than just unilateral tariffs. We need allies. We need to be bringing aggressive cases and new agreements to the World Trade Organization. It’s a whole-of-government approach to China, not just in the trade space.”
Consumers trying to avoid tariffs altogether might find it impossible, even if they do go with Trump’s recommendation and purchase an American-made good over an item subject to tariffs. Many of the taxed items are intermediate goods — or products that companies use to assemble a final good. That means American firms likely use a taxed item in their supply chain, says Gary Hufbauer, non-resident senior fellow at the Peterson Institute for International Economics.
“It gets to firms that are investing and using that piece of equipment in their business,” Hufbauer says. “These buyers, they’re going to end up paying more, and down the line, people can watch their prices and notice them being nudged up on various products they typically buy.”
By adding tariffs, you also create room for more hurt through retaliation on the other side, Adams says. American farmers, for example, have been hurt by duties imposed on China’s end.
Effects from tariffs “on growth in the U.S. is going to come through other channels, not just through the effect of tariffs on American (companies’) purchases,” he says. “China’s retaliated most directly against the U.S. agriculture sector, so we’re seeing lower food prices, lower farming profits because of Chinese tariffs. That’s a concentrated drag caused by Chinese retaliation.”
How might this impact your wallet?
That’s a bit of a discrepancy from what the president communicates about tariffs, who repeatedly claims that, when the U.S. places a tariff on an import from another country, that country pays the bill.
“He’s trying to say that the tariffs won’t result in U.S. price increases, they will result in China accepting lower prices for their products, but it’s just the reverse,” Hufbauer says. “Most of the impact from tariffs is on the buyers, maybe a little bit on suppliers, but it’s mainly the consumers who pay.”
That’s because “tariffs are a tax on imports,” Adams says. “If an American company buys $10,000 worth of Christmas lights,” an item that is subject to the new tariff level, “then it has to pay a 25 percent tax to the U.S. government on those Christmas lights. That increases the price of Christmas lights in the U.S.”
Companies can choose to absorb those cost increases, Adams says, but that becomes harder when tariffs keep climbing. Eventually, firms may have to pass that along to consumers in the form of higher prices.
“The longer tariffs are in place, the more pressure American businesses will be under to pass on those costs to their customers,” Adams says. “Eventually those price pressures will flow to a supply chain and be felt by consumers.”
Tariffs imposed in 2018, for example, reduced consumers’ inflation-adjusted income by $1.4 billion per month by the end of the year, a Princeton University research report found.
Trump’s top economic adviser Larry Kudlow acknowledged on Sunday that consumers are going to bear the brunt of the pain, contradicting previous claims that Trump has made about China footing the bill.
“Both sides will suffer on this,” Kudlow said in an interview on “Fox News Sunday.”
But the broader consequences are more than just price pressures, Hufbauer says. The bigger affect is how much the trade war weighs on business confidence, evident by the recent bout of market volatility.
“Business confidence is getting eroded because of this trade war,” Hufbauer says. “All the foundations are being eroded, and if this goes on for the next stage, it’s quite possible that, in the bank, there will be a slowdown in the economy and possibly a recession. That’s when people will really notice.”
But even though a trade war can exact pain for the economy and for consumers, Kudlow said it’s in the United States’ best interest.
“We have had unfair trading practices all these years,” Kudlow said. “In my judgment, the economic consequences are so small that the possible improvement in trade and exports and open markets for the United States, this is worthwhile.”
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