On Friday, July 6th, at exactly 12:01 am, the U.S. fired the first shots of a kind of war. They weren't missiles, or drones, or marines, but instead, billions of dollars worth of tariffs aimed at the Chinese economy, with more coming soon. This is a trade war. One that could become the largest in world history. Here’s what you need to know:
- A trade war happens when one country imposes protectionist trade barriers on another country's imports in response to trade barriers put up by the first country.
- Advocates say trade wars protect national interests and provide advantages to domestic businesses.Critics of trade wars claim they ultimately hurt local companies, consumers, and the economy.
- The current trade war playing out between America and China has no clear winner yet, but time will tell.
The Basics of Trade Wars
The term trade war is used to describe an economic conflict where, in response to protectionism, states put up trade barriers like tariffs, restrictions, and quotas, against each other. It becomes a trade war when the target of these barriers sets their own trade barriers in place, responding in kind. Basically, one state will impose targeted tariffs on another state’s economy in order to protect its own economy, or to hurt an adversary’s.
“Trade wars can commence if one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers. Trade wars are also a result of a misunderstanding of the widespread benefits of free trade."
Let's say Country A and Country B both manufacture rubber chickens. County B then starts to subsidize rubber chicken manufacturing, which means that the government of Country B is paying part of the cost of manufacturing, thus reducing the price for consumers. Now, Country A is upset, because no one is going to buy rubber chickens from them if it's cheaper to buy them from Country B. So, Country A has two options: They can negotiate with Country B, or they can impose tariffs on imported rubber chickens, which would raise the cost of Country B's rubber chickens, punishing Country B. If Country B wanted to export rubber chickens to Country A, they would have to pay a higher tax. Then Country B could hit back with its own tariffs. If the tariffs keep going back-and-forth, it would be considered a trade war.
Countries get into arguments and conflicts over trade frequently. To sort them out, they can go to the World Trade Organization (WTO) and have the organization arbitrate the disagreement, eventually deciding who’s right and who’s wrong. There, they can negotiate a deal directly with each other. The other option, the one chosen by the Trump administration is to simply impose unilateral tariffs on an opponent's goods in the hopes that they will buckle.
How Will it Play Out?
On Friday, July 6th, The Trump administration imposed sweeping tariffs on $34 billion worth of Chinese goods. The tariffs target manufactured tech products from flat-screen televisions, aircraft parts, and medical devices to nuclear reactor parts, and self-propelled machinery. While most American’s won't feel the consequences of these tariffs—you won't go to a store and see that your favorite aircraft parts are 15% more expensive— the Chinese economy will certainly suffer. The U.S. tariffs specifically target high-tech Chinese goods to hurt the “Made in China 2025” initiative which seeks to transform China into an advanced manufacturing powerhouse.
Hours before the midnight deadline on Friday, President Trump pushed further, warning that the U.S. may ultimately target over $500 billion worth of Chinese goods which is roughly the total amount of U.S. imports from China in 2017.
In response to these new tariffs, China imposed their own tariffs that target American agricultural products like pork (which adds $39 billion yearly to the U.S. GDP), soybeans, and sorghum. The Chinese tariffs target American farmers and big industrial-agriculture operations in the midwest, home to constituencies that largely voted for Donald Trump in 2016. It's these politically powerful groups of Americans that the Chinese are looking to make a direct and dramatic impact on with the targeted tariffs. As the 2018 midterm elections approach, if President Trump’s own constituency and the powerful agro-farm sector are hit hardest by these tariffs, then perhaps they will pressure him to lower the barriers.
Why China, Why Now?
So why China and why right now? The first reason points to growing concerns about Chinese economic practices. The largest set of tariffs from the Trump administration did originate from a federal investigation into Chinese intellectual property misdeeds. The Trump administration designed the tariffs to punish China for trading access to the Chinese market for foreign tech plans. While those concerns are valid, they existed under President Bush and President Obama and they both refrained from imposing tariffs to the magnitude that we are seeing today.
The second reason is about the U.S. trade deficit with China. According to data released by the Commerce Department, the gap between American goods exported to China and Chinese goods imported to the U.S. rose to about $375.2 billion last year from $347 billion the year before. The Trump administration has been promising to eliminate the trade gap and has blamed the imbalance on the decline of American manufacturing and a reliance on foreign goods. With these newest tariffs in place, the Trump administration hopes to reverse the growth of our trade deficit and punish China for its trading practices.
What Does it Mean for American Consumers?
So, you hear that the two largest economies are in a trade war? What does that mean for people working and living in the United States?
First, it's important to understand that U.S.-China trade does not happen in a vacuum. It happens in the web of a global economy where purchased goods are made and sold through several different countries before reaching their final destinations. When the U.S. puts tariffs on China, the world’s largest manufacturing hub, it will likely affect many other countries, products, and companies that rely on this global supply chain.
Research from the Peterson Institute for International Economics shows that in an industry like computer and electronics products, for example, mostly non-Chinese corporations who operate in China supply 87% of the products that will be affected by the tariffs, while Chinese firms send only 13%. In our global, interconnected economy, it is nearly impossible to target one country or one industry without affecting the rest, and maybe even some allies.
These tariffs have the potential to hurt American companies even more than the firms in China targeted by the Trump administration. A study by the Federal Reserve Bank of San Fransisco in 2011 showed that for every dollar spent on an item labeled “Made in China”, 55 cents went to services produced in the United States. This is yet another example of how raising tariffs and starting trade wars in a global economy might come back to hurt U.S. businesses and consumers.
American consumers won’t feel the consequences of Trump’s trade war with China for some time, but they will eventually. There is a buffer. When companies have to make up for higher costs because of new tariffs, they have to shift that burden onto consumers. It takes time for these higher business costs to filter down through to stores. It is likely that we will see some prices go up, but it won't happen overnight.