Understanding Tariffs: How the Global Trade War Will Impact You
United States President Donald Trump believes it will be easy for the U.S. to win its trade war with China.
China exports approximately $500 billion worth of goods to the U.S., while the U.S. only exports around $150 billion to China. So, among other things, President Trump is betting China will run out of retaliatory tariffs to slap on U.S.-produced products, meaning his strategy of slapping tariffs on goods made in China and other countries is an easy way to boost the American economy.
If only winning a trade war were that easy.
Work + Money reached out to economists and asked them to explain tariffs, the current trade war and what we should expect moving forward.
"Tariffs typically harm consumers in the short run as they are forced to pay higher prices than they would otherwise pay," said John Linton of Elbert Capital Management. “Tariffs typically harm the macro-economy in the long run as domestic companies become less competitive in international markets as they enjoy their pricing protection at home."
Before we dig into the details, though, let’s establish the basics.
What Are Tariffs?
Think of tariffs as taxes that are imposed at the border before a product enters the country.
James Bell of Bell Investment Advisors in Oakland, California, says while politicians usually push for tariffs as a way of protecting domestic manufacturers from foreign competitors, they end up being the weapon of choice in trade wars. And the casualties in trade wars tend to be the very people politicians are promising to protect.
Are Trade Deficits Bad?
The problem the Trump administration is trying to solve with the tariffs against China is the trade deficit, meaning the United States imports more goods from China than it exports to China.
President Trump wants more balanced trade and to bring down barriers — “fairness and reciprocity,” according to an interview his chief economic adviser Larry Kudlow gave to FOX Business.
Bell doesn’t see a trade deficit as fundamentally a bad thing.
"I believe trade deficits are a sign that Americans are getting great deals,” he said. “For example, Americans buy 42 percent of their clothing and 72 percent of their shoes from China, and as a result, a shopping cart of clothes purchased in America costs less than it did 20 years ago. American consumers have saved billions of dollars over the past decades by getting great deals from Chinese imports."
The numbers and renowned economists back Bell up. Over the past decade, rich economies with trade deficits have grown faster than surplus countries. Or, as Harvard economist Robert Lawrence argues, "It makes no sense for us to make things at home if it costs less to import them. We raise living standards by sending the Chinese airplanes that we exchange for their clothing."
Tariffs as a Negotiating Tactic
The Trump administration argues that its tariffs are a tactic in its larger effort on trade.
“When you have these complicated trade negotiations, part of it — and part of the president's quiver — is going to be tariffs, whether we like it or not,” Kudlow told FOX Business. “But he has to use them in order to achieve the goal of leveling the playing field and bringing down these barriers.”
Tariffs Work – Theoretically
Tariffs are a way of boosting domestic production by limiting imports and, by extension, limiting competition. The theory: that keeps American production lines running, and that keeps American workers working. But the unintended consequence of tariffs is that as competition diminishes, costs go up. Workers have jobs, but they can’t afford to buy as much with their earnings.
That's why economists look at consumption, and not trade deficits, as a measure of true economic growth.
"If Americans can afford more purchases, that is a net positive for their households. So a trade deficit is not a concern,” Bell said. “For economists, free-trade leads to a bigger economy, and tariffs cause the economy to shrink."
But China Is Still the Bad Guy, Right?
To be clear, Chinese trade policies hurt American companies.
In steel manufacturing, for example, the Chinese government subsidizes steel companies to make more steel than the world market needs. That steel is then sold for prices below what it costs steel makers in other countries to make steel, meaning they must sell their product at a loss.
In the tech sector, U.S. companies that want to do business in China have to relinquish proprietary technology.
But tariffs don’t necessarily fix either of those problems. Tariffs represent a go-it-alone strategy by the U.S. Bell thinks the better solution is to put political pressure on China to curb unfair trade practices.
Tariffs Are Already Hurting the Economy
Kevin Williams, an attorney in Chicago who specializes in customs and international trade law for the law firm Clark Hill, says his clients are already seeing steel prices go up "across the board," and are unable to buy steel locally for cheaper prices.
The steel and aluminum tariffs went into effect July 6, and China, the European Union, Canada and Mexico retaliated almost immediately with tariffs of their own on U.S.-made products.
The biggest initial impact, Williams said, has been on U.S. soybean farmers, as China's responded with a 25 percent tariff on soybean imports. "China purchases 40 percent of the world’s soybean production. Prices have hit a nine-year low. After the duties were announced, soybeans dropped 25 percent," he said.
Tariffs Aren’t Protecting Workers
Williams notes that some assembly work has already moved to Canada to skirt tariffs. "I do not see how that helps the U.S. workers," he said.
But Williams said everyone should expect to feel the impact of the tariffs if they haven't already. Each escalation of the trade war has a chain reaction effect that ricochets around the economy.
"In the short term, the damage to the economy is going to affect everyone," he said. "Farmers will be hurt with lower prices, they won't be able to buy equipment, and equipment they will want to buy will be more expensive because it is made with steel and aluminum."
The Trump administration said it will spend up to $12 billion to subsidize U.S. farmers who are being affected by the new tariffs.
Tariffs Decrease the Ability of American Companies to Compete Globally
Linton, of Elbert Capital Management, notes that as tariffs decrease competition, there is a longer-term effect on U.S. companies.
"The intent of tariffs is typically to make imported goods more expensive, therefore making domestically produced goods more attractive to purchasers,” he said. “While tariffs may have this desired effect in the short-term, tariffs are generally quite bad for an economy in the long-term.”
He adds: “Often times you'll see the domestic producers that are protected by tariffs become less competitive as they have a pricing advantage imposed by the government. As tariff-protected businesses become less competitive, they typically are less able to compete in international markets as they have less incentive to find ways to decrease costs or create new innovations."
Tariffs Increase Inflation
Tariffs may help certain companies and certain industries, but they come with a high cost to the overall economy, said Robin Lee Allen, a managing partner with Esperance. When people can buy fewer goods with their money, the overall economy sees increasing inflation rates.
"Oftentimes, by the time tariffs are applied domestic suppliers of goods are already under economic duress,” Allen said. “In the short term, tariffs may help these producers, but usually at the cost of rising inflation. The national currency buys progressively less goods per unit, which mutes perceived gains derived from the application of tariffs."
Tariffs Can Impact Housing
Constantine Valhouli, the CEO and co-founder of the real estate analytics and data firm NeighborhoodX, says while steel and metals tariffs have garnered most of the headlines, other tariffs could have more of an impact on housing prices.
Valhouli noted a tariff of about 20 percent that was slapped on softwood imports coming from Canada that is likely to raise the costs of new construction, which will reverberate throughout the housing market.
"Larger buildings typically require more steel and aluminum in their framing, and so could see a larger slowdown in construction activity,” Valhouli said. “This could also translate into the significant loss of jobs in these sectors, as well as higher rental rates as increases costs are passed on to consumers."
Some States Are Worse off Than Others
Valhouli notes that states import goods at wildly different rates.
"Geographically, certain regions have more exposure to tariffs," Valhouli said. "Texas, Michigan and California have eighty to one hundred billion annual import volumes from Canada and Mexico, while states like Pennsylvania, Indiana and Tennessee have less than fifteen billion import volumes. As a result, tariffs would affect these regions unequally."
Tariffs Cause Uncertainty
Using construction as an example, Valhouli notes that tariffs add risk, which ultimately hurts the overall economy.
"Tariffs have an indirect effect on the market overall by stifling economic growth,” Valhouli said. “By adding to cost, risk, and making it more difficult to forecast accurately, developers may choose to delay or pause projects. Given that there is already a demand that outstrips supply of buildings expected to be listed for sale in certain major metro regions, this could cause prices to rise for existing properties."
In manufacturing, companies have suddenly had all the rules they have been playing under torn up and rewritten, Williams adds.
"Companies spend years setting up infrastructure and supply chains that depend on the existing structure," he said. "The auto industry supply chain is built around NAFTA. Pieces move around between three countries before they are assembled into a car."
The U.S. Tariffs Remain for Now
President Trump continues to believe in tariffs. On July 24 he tweeted:
“Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that - and everybody’s talking! Remember, we are the ‘piggy bank’ that’s being robbed. All will be Great!”
After meeting with European Commission President Jean-Claude Juncker on July 25, Trump also said he would work with the EU on a deal "toward zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods."