Announcing his intentions on Thursday to hit all remaining imports from China with tariffs, President Trump is now all‐in on the trade war. This doesn’t bode well for Americans’ wallets, bilateral relations or the global economy.
As costly as this course of action will prove to be, it isn’t hard to understand why Trump has continued down this treacherous path. The adverse consequences of the trade war so far have been contained. The president believes he has the leverage to bend Beijing to his will. And if he were to ease up on the pressure, Trump would be portrayed as weak by the dozen or more Democratic presidential aspirants hoping to outflank him with protectionist promises to win back Rust Belt voters.
Tariffs on imports from China, which Trump first imposed last summer, were gradually broadened and increased over the course of the ensuing 12 months. As of this moment, U.S. Customs is assessing taxes of 25% on about $250 billion worth of imports from China. Most of those products are capital equipment and “intermediate goods,” which is to say machinery, raw materials and components required by U.S. producers to manufacture their own output for sale in the United States and abroad.
Of course, those taxes get passed on to U.S. consumers in the form of higher prices (to cover the higher costs of production) and to workers whose compensation and hours worked suffer from their companies’ dwindling profits. According to a report from the Federal Reserve Bank of New York, “Over the course of 2018, the U.S. experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply‐chain network, reductions in availability of imported varieties, and complete pass‐through of the tariffs into domestic prices of imported goods.”
However, even though the costs are real and consequential, to a large extent the pain has been dispersed and the cause and effect has been hard for people to discern.
But as of Sept. 1, the remaining 55% of imports from China (about $300 billion worth of mostly consumer goods) that have thus far been spared the tariffs, will be taxed at 10%. A few words of advice: Go shopping. Now! Buy your phones, laptops, clothes, furniture, hockey gear, football helmets and hand tools now.
In 2017, the last full year before Trump’s punitive tariffs were imposed, U.S. imports from China totaled $504 billion, and duties paid by U.S. importers to U.S. Customs amounted to $13.5 billion. That’s an average applied tariff rate of 2.68%. In 2018, when tariffs of 25% on $50 billion of Chinese goods were imposed in June and July, and additional tariffs of 10% on $200 billion of Chinese goods were imposed in late September, the value of imports from China totaled $544 billion and the duties collected came to $23 billion — an average applied tariff rate of 4.23%.
Nearly $10 billion of costs associated with the higher tariffs were imposed on consumers, businesses, shareholders and employees.
So far, the pain has been concentrated in a few sectors and dulled by subsidies and the fiscal stimuli of lower taxes and much higher public spending. But as this sugar high wears off and the economy slows, conditions are likely to worsen. Hang on.