As China and U.S. Up the Ante, When Should Americans Worry About a Trade War?

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Updated on Friday, April 6, 2018

The story was originally published on April 4, 2018.

Update: Trade dispute between the United States and China escalated for the second time this week as President Donald Trump threatened late Thursday to add tariffs on additional $100 billion in Chinese goods, a week after announcing tariffs on $50 billion in Chinese imports.

Trump said the new tariffs were a response to China’s “unfair retaliation” of announcing its intention to impose 25% tariffs on $50 billion worth of U.S. exports. China was answering the Office of the U.S. Trade Representative’s (USTR) Tuesday plan to impose 25% tariffs on 1,300 products imported from China.

“If the U.S. persists in unilateralism and trade protectionism despite opposition from China and the international community, China will fight to the end and hit back resolutely,” a spokesperson for the Chinese Ministry of Commerce said in a statement Friday in Beijing.

The U.S. imports $479 billion worth of goods from China, its largest trading partner. If the announced U.S. tariffs on $150 billion in Chinese products were to be implemented, nearly a third of Chinese imports would be affected.

The Trump administration was first to the punch. On Tuesday evening, it proposed a plan to slap 25% tariffs on 1,300 products imported from China. The products range from industrial supplies, machinery and raw materials to consumer goods, such as dishwashers and automobile parts, according to the Office of the U.S. Trade Representative (USTR).

In retaliation, China immediately announced its intention to impose 25% tariffs on $50 billion worth of U.S. exports. The list included soybeans, airplanes and automobiles, as trade experts had expected earlier.

China and the U.S. have been swapping tariff threats for the past few weeks. Neither country has imposed this week’s newly announced taxes yet, but it’s certainly a game of global trade “chicken” that has the whole world watching.

“This is very nerve-racking,” said Sherman Robinson, a nonresident senior fellow at the Peterson Institute for International Economics, a nonpartisan, nonprofit think tank in Washington D.C.. “The U.S. has basically gone rogue in the world trading system, and the Chinese are simply reacting to what the U.S. is doing.”

How did we get here?

President Donald Trump has been tough on trade since he was on the campaign trail as a presidential candidate and has had China in his crosshairs for a while, arguing the country hasn’t been playing fair on trade. Many critics agree that China has in some ways stymied growth in U.S. industries, and supporters of the new tariffs hope it will force China to play fairer on trade.

Trump made good on his campaign promise to rein in trade by announcing sanctions on steel and aluminum imported from China in early March. Later in the month, he threatened to impose 25% tariffs on $50 billion worth of Chinese industrial goods. At the time, the list of products impacted wasn’t released. Until now.

In turn, the Chinese Ministry of Commerce announced it would impose higher duties on $3 billion worth of 128 U.S. products exported to China, including fresh and dried fruits, pork, wine, seamless steel pipes and recycled aluminum, in response to the steel and aluminum sanctions. China imposed these tariffs on Monday.

Where Americans will feel the sting

Eventually, consumers will begin to feel the impact in indirect ways. For starters, the stock market plunged Wednesday morning in response to the newest tariff announcements (but later rebounded). And eventually, consumers may see higher prices on goods that are made using Chinese-sourced parts, experts say.

U.S. tariffs on Chinese imports will raise the prices of the resources used to produce final products for U.S. manufacturers and producers, which will eventually get passed along to American consumers in the form of higher prices, explained Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

In addition, many jobs may be at risk in both countries, as sales and profits would decline as the cost of goods and services rise, Perry said.

This time around, China —  America’s third-largest export market, and the second largest market for U.S. exported agricultural products — is targeting U.S.-exported aircrafts and agricultural products such as soybeans, which could have a much larger-scale effect on the U.S. economy.

“It’s going to hit right up in the Midwest, where all our soybeans are produced,” Robinson said. “It’s going to hit Seattle, where our airplanes are produced and all over the industry in the Midwest and East.”

Consequently, farmers, automakers, Boeing and their suppliers could lose business, Robinson said, and workers could lose jobs.

Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials because everything they buy contains steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.

“If it hits fast, there will probably be macro shots, you’ll have repercussions with stock markets and you may have layoffs,” Robinson said. “If it’s slow, then there’s time for adjustment. You’ll see people lose jobs, but there will be time for the labor market to adjust.”

Experts had long predicted that China would target U.S. agriculture products and airplanes. But the Trump administration’s decision not to target everyday consumer products imported from China, such as textiles, garments and shoes, was a surprise.

The likely reason is that the Trump administration has been careful not to do anything that would directly hurt consumers, Robinson said. Another reason could be that hitting the apparel industry could hurt the first daughter and adviser to the president, Ivanka Trump, who owns a namesake clothing line, Robinson said.

“Her imports of her clothing line would not be affected by the U.S. tariffs [Trump announced Tuesday],” Robinson said.

‘The ball is really in the U.S. court. They’re the ones who started this.’

Robinson explained that a trade war usually starts out with just a few sectors and then escalates to include other sectors as well. He said whether there will be a full-blown trade war is mostly depended upon what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.

If we moved toward a widespread trade war, the most extreme result could be that the U.S. decides to withdraw from the world’s trading system, cutting both exports and imports, Robinson said. And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they’re pursuing, then it would mostly hurt the U.S., he added.

And American consumers would ultimately pay the price.

“It would damage the structure of the U.S. employment if it’s done rapidly. It would undoubtedly cause some kind of a recession,” Robinson said. “If it’s done slowly over time, it means a major change in the structure of production, basically away from tradable goods to non-tradable goods. We become a nation of services workers, hamburger flippers.”

This would be the opposite of the stated goal of the USTR and Department of Commerce, which is to bring industries back to the U.S.

China’s Foreign Ministry spokesperson Geng Shuang said in a Wednesday press conference that China is open to further dialogue.

“We hope that the U.S. side could have a clear understanding of the current situation, remain level-headed, listen to its business community and general public, discard unilateralism and trade protectionism as soon as possible, and work with China to resolve trade disputes through dialogue and consultation,” said Geng.

“It may be that now having up the ante, everyone will step back and behave like adults,” Robinson said. “But the ball is really in the U.S. court. They’re the ones who started this.”

If history is any indicator, there is no winner in a tit-for-tat trade war, experts say.

“There’s a long history of previous attempts at trying to impose tariffs and protectionism,” Perry said. “We have mountains of evidence that this has never worked out in favor of the country imposing protectionism, but it’s like seems like an economic lesson that we never really learn.”

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