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Updated on Wednesday, March 28, 2018
Tensions over trade are percolating between the United States and China as President Donald Trump on March 22 threatened to impose higher tariffs on a wide range of Chinese imports, just weeks after announcing sanctions on steel and aluminum imported from China.
These are not just big, empty talks between Washington and Beijing. The stock market plunged in fear of a looming trade war. Experts interviewed by MagnifyMoney say the consequences of trade fights would eventually be passed onto consumers; historically, there is no winner in a tit-for-tat trade war.
“Our exporters would be disadvantaged. Our farmers would lose some sales. Import prices would go up for U.S. companies,” said Mark Perry, scholar at The American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint. “U.S consumers would be negatively affected with higher prices, and the U.S. workers could see some job losses.”
Where consumers will feel a difference
Trump’s threat is to impose 25 percent tariffs on $60 billion worth of Chinese industrial imports in response to China’s alleged practice of forcing foreign firms to transfer technology and intellectual property in joint ventures.
The details of exactly which items will be subject to higher tariffs are currently unknown. The United States Trade Representative (USTR) has 15 days from the date of Trump’s announcement to release a finalized product list.
Experts say consumer electronics, industrial machinery, toys, apparel and footwear would be the easy targets among other goods imported from China.
If the tariffs fall on consumer goods, consumer product prices could rise, experts say.
Sherman Robinson, nonresident senior fellow at the Peterson Institute for International Economics, told MagnifyMoney that a key question is how much of those tariffs fall on intermediate goods — bits and pieces of a final product — that U.S. producers buy from China to assemble and produce final products. Apple products, for instance, use screens produced in China. If the goods and services used in the production process were cut off, U.S. productions would be damaged, Robinson said.
“The question is, would the administration be careful enough not to damage U.S. producers?” Robinson said.
Already, experts estimate that new tariffs on steel and aluminum that went into effect March 23 will cause higher prices for the two materials.
Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials for everything they buy that has steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.
Jobs might be at risk, too. In the auto industry, for example, if automakers were to see their profits decline as a result of the higher cost of Chinese imports, there’s a risk they could lay off some of their workers, Perry said.
Ted Fishman, author of “China, Inc.: How the Rise of the Next Superpower Challenges America and the World,” told MagnifyMoney it’s unclear how the potential tariffs on Chinese imports would eventually play out because global juggernauts, like Apple, gain huge profit margins by sourcing parts and labor in China.
“They might pay more for [the resources they use to produce the products], but they might be selling at the same price,” Fishman said. “It’s because supply doesn’t dictate their price, but demand does in a globally competitive world.”
But Fishman said that companies whose margins are much thinner might suffer from higher tariffs, eventually marking up their final products’ prices.
Footwear companies may be a case in point.
Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, a trade group, told MagnifyMoney that about 70 percent of all the shoes sold in the U.S. come from China, which already has an average tax of 11 percent imposed by the U.S., nearly 10 times the average 1.3 percent duties applied to all Chinese imports.
“When there is the potential to add additional tax on Chinese goods, and rumor that those goods could include footwear,” Priest said. “We obviously grow very concerned because we go based on history, based on economics, based on the structure of our industry that that will be that Americans will pay more for their shoes.”
How likely is a full-on trade war?
In retaliation to the previous steel and aluminum sanctions, 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.
“China does not want a trade war with anyone. But China is not afraid of and will not recoil from a trade war,” the Chinese Embassy said in a statement.
China’s response to Trump’s tariff announcement seems largely muted. Of the $3 billion in U.S. exports it plans to impose higher tariffs on, most are agricultural and metal products.
However, Fishman said this is a strategic way to answer Trump’s tariff threat — by pressuring him in areas that are politically significant to him.
This action could potentially hurt U.S. farmers and manufacturers in the Midwest and the West, important regions for Trump.
“They don’t want to have this escalate too far, and Trump’s kind of unpredictable,” Perry explained. “Trump is acting politically, so it would make sense for China on the other side to act with some political motivation, and strategically design their trade policy to hurt Trump as much as possible.”
If trade tensions continued to escalate, experts anticipate China’s next target would be Boeing aircrafts, soybeans and U.S. business services, which would have a much larger-scale impact on the U.S. economy.
Cui Tiankai, China’s ambassador to the U.S., said that China is looking at “all options” to respond to tariffs imposed by the administration, including cutting back on buying U.S. Treasury bonds, in an interview with Bloomberg.
“We believe any unilateral and protectionist moves would hurt everybody, including the United States itself,” Cui said. “It would certainly hurt the daily life of American middle-class people, and the American companies, and the financial markets.”
No real winners
Robinson explained that a trade war usually starts out with just a few sectors and then retaliates across other sectors. He said whether there will be a full-blown trade war is mostly up to 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, it’s very possible that the result would be the U.S. withdrawing 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.
“Hopefully this is Trump just kind of being a little bit exaggerated or outrageous or, just doing this as an initial move and then he’ll back off on it,” Perry said. “There’s a long history of previous attempts at trying to impose tariffs and protectionism. 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.”