Trump’s fight with China could cause have major economic consequences — here’s what tariffs are, and how they could affect you

President Donald Trump

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President Donald Trump
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Chris Keane/Reuters

  • President Donald Trump has announced that the US plans to impose tariffs on imports from China.
  • China has responded with tariffs on US imports to China.
  • Tariffs are taxes on imports designed to boost US production of goods.
  • The new tariff will cause costs to go up for businesses that use Chinese goods – and possibly jump prices for consumer goods, too.

President Donald Trump and the US Trade Representative rolled out a list of goods from China that will subject to new tariffs, a move that will have consequences for a wide swath of American consumers and businesses. Subsequently, Trump has threatened tariffs on $100 billion in goods.

The measures are designed to protect US businesses from Chinese intellectual property theft. But they could also have serious consequences for businesses that use the goods from China – as well as consumers that buy those goods.

China has responded with tariffs of its own, targeting US cars and soybeans, which could exacerbate these problems.

What is a tariff?

  • A tariff, in plain terms, is a tax on goods coming into a country.
  • In the US, many tariffs are paid at the time of entry into the US via a customs broker or agent – along with other duties and fees that may apply to the import.
  • The idea of a tariff is to push up the price of foreign goods to make the US-made option more attractive.
  • In this case, Trump is attempting to get companies to use less Chinese-produced goods and opt for items made in the US or a imported from a more friendly trade ally.

Hans Mikkelsen, a Bank of America Merrill Lynch strategist, said the new taxes will shift the supply and demand for the various goods they are imposed on.

“International Trade 101 analyses the partial equilibrium effects of a tariff as driving a wedge between demand and supply curves, whereby the price goes up and the quantity down,” he said in a note to clients.

What does it mean for businesses?

  • For many businesses that use Chinese goods to make their products, the cost to produce their items will increase.
  • A more direct example comes from Trump’s recent tariffs on steel and aluminum imports. The Beer Institute – a trade group that represents beer manufacturers – said the 10% aluminum tariff will add on an additional $347.7 million in costs for American brewers.
  • Other companies are also expected to take a hit from the new tariffs.

Additionally, the higher costs could cause businesses to find other areas where they can save money, including paying workers. Studies found that the most recent steel tariff imposed by President George W. Bush in 2002 resulted in as many as 200,000 jobs lost in industries that use steel to make their products.

us imports subject to trump proposed section 301 chart trade war

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Samantha Lee/Business Insider

What does it mean for the average American?

  • Businesses that see the cost of goods rise have three options to make up the losses: cuts costs in other areas, simply absorb the cost and accept lower profit margins, or pass the costs onto consumers.
  • The latter option is concerning to economists because it could lead to a slowdown in consumer spending and an uptick in inflation.

“So, for consumers, tariffs are like sales taxes in that they increase prices,” Erica York, an analyst at the right-leaning Tax Foundation said in a blog post after Trump’s original metals tariffs.

Commerce Secretary Wilbur Ross said in a CNBC appearance that the increased cost for a car would amount to about $175, which he called “no big deal.” On an aggregate scale, however, the increase adds up.

Over 17.2 million cars were sold in 2017, meaning that if Ross’s math is right, Americans would pay about $3 billion more for vehicles under the new tariffs amid similar purchasing patterns.

us exports subject to china tariff retaliation trade war

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Samantha Lee/Business Insider