Trade Wars and How They Affect You

Why Trade Wars Are Bad and Nobody Wins

Trump and Xi Jinping
•••  Photo by Pool/Getty Images

A trade war is when a nation imposes tariffs or quotas on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade.

A trade war starts when a nation attempts to protect a domestic industry and create jobs. In the short run, it may work. But in the long run, a trade war costs jobs and depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.

The last major trade war occurred with the 1930 Smoot-Hawley Tariff. It increased 900 import tariffs by an average of 40 to 48 percent. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. But it also raised food prices for Americans who were already suffering from the Great Depression. Other countries retaliated with their own tariffs. It forced global trade down by 65 percent, worsened the depression, and contributed to the start of World War II.

Trump's Trade War

On March 8, 2018, President Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. Trump said, "Trade wars are good, and easy to win." But the markets disagreed. Stock markets around the world tumbled in fear of a trade war between the world's three largest economies.

The U.S. Congress is the only body authorized to impose tariffs. But Trump used a special power granted by Congress in 1962. It allows a president to curb imports that threaten national security. The Commerce Department reported that dependence on imported metals threatens the U.S. ability to make weapons. But the Aerospace Industry Council said Trump's tariffs would instead raise costs for the military and exporters. 

Eight countries have filed formal complaints with the World Trade Organization. Many of these countries, like Canada, India, and the EU, are allies. They say Trump cannot justify the tariffs on the basis of national security. The other five complainants are Mexico, Norway, Switzerland, China, and Russia.

America is the world's largest steel importer. Trump believes the tariffs would protect the 147,000 workers in the U.S. steel and aluminum industries. But they could hurt the 6.5 million workers in U.S. industries that import steel.

A trade war raises costs for steel users, like automakers. Tariffs lowered second-quarter profits for the big three automakers. To satisfy shareholders, they may have to pass those costs onto consumers. Costs have already outweighed the benefits of Trump's tax plan.

The tariff is in effect against China, Japan, and Russia. Japan's trade minister said, "I believe there is absolutely no impact on America's national security from imports of steel and aluminum from Japan, which is an allied nation."

On March 26, 2018, Trump exempted South Korea from the steel tariff. The U.S. ally is the third largest foreign supplier of steel. In return, South Korea agreed to amend the 2012 bilateral trade agreement. The United States will keep its 25 percent tariff on pickup trucks for an additional 20 years. Under the original agreement, the tariffs would have expired in 2021. South Korea agreed to double its import quota for U.S. cars. Argentina, Australia, and Brazil were also exempted. The United States has a trade surplus with Australia.

 

At first, Trump said Canada and Mexico would be exempt until his administration renegotated the North American Free Trade Agreement. Canada is the largest source of U.S. steel imports. Mexico is the fourth largest.  

Mexico will also impose tariffs on imports from the United States. It will target industries in areas that supported Trump. These include flat steel, lamps, and pork products.

After the June 11, 2018, G7 meeting, Canadian Prime Minister Justin Trudeau said Canada would retaliate with tariffs.

The head of the U.S. Chamber of Commerce said Trump's trade war could cost 2.6 million U.S. jobs. He included the effects of Trump dumping NAFTA.

On August 10, 2018, Trump announced he would double the tariffs on aluminum and steel imports from Turkey. He was trying to obtain the release of jailed American pastor Andrew Brunson. Turkey claims he was involved in the 2016 coup to overthrow the government. The U.S. move lowered the value of the Turkish lira to a record low against the U.S. dollar. This renewed fears that the poor health of the Turkish economy could trigger another crisis in the eurozone.

On September 12, a wide range of U.S. companies formed "Tariffs Hurt the Heartland" to convince Trump to end the trade war. Some businesses are concerned about rising costs of imported materials. Farmers are hurt by retaliatory tariffs imposed by China and Europe on U.S. exports.

Trade War With the EU

Trump initially delayed the tariff against the European Union until June 1, 2018. He wanted the U.S. ally to cut its 10 percent tariff on U.S. autos. He also asked the EU to set quotas on its steel exports. 

But on May 31, 2018, Trump announced the tariff would be imposed on Canada, Mexico, and the EU. The U.S. Aluminum Association said the move will disrupt "supply chains that more than 97 percent of U.S. aluminum industry jobs rely upon.”

On June 21, Germany proposed an end to the EU's 10 percent tax on U.S. auto imports. In return, Trump must forget about imposing a 25 percent tax on European auto imports. There is already a 25 percent U.S. tariff on light trucks. On June 22, the EU imposed tariffs on $3.2 billion of American products. It targeted imports like bourbon, motorcycles, and orange juice that will impact Trump’s political base.

Both moves follow the April 21, 2018, EU upgrade of its trade agreement with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.

On July 17, the EU signed a trade agreement with Japan. It reduces or ends tariffs on almost all goods. It's the largest bilateral trade agreement, covering $152 billion in goods. It will come into force in 2019 after ratification.

On July 25, 2018, the EU and the United States agreed to hold off on any new tariffs, reassess the steal and aluminum tariffs, and work toward zero tariffs on non-auto industrial goods. The EU agreed to import more U.S. liquified natural gas and soybeans. That would reduce its reliance on Russian LNG, and help out American farmers who have lost the Chinese market due to the trade war. But Russia's LNG price is much lower than America's, so it's unlikely any big changes will be made there.

U.S. Trade War with China

On January 22, 2018, President Trump imposed tariffs and quotas on imported Chinese solar panels and washing machines. China is a world leader in solar equipment manufacturing. The World Trade Organization ruled that the United States didn't have a case in levying the tariff. In August, 2018, China filed a complaint with the WTO.

On March 8, 2018, Trump asked China to develop a plan to reduce the $375 billion U.S. trade deficit by $100 billion. China is amenable to the idea. Part of China's economic reform plan is to reduce its reliance on exports. But it cautions there isn't much it can do, since the deficit is fueled by high U.S. demand for low-cost Chinese goods.

On March 22, 2018, the Trump administration upped the ante. It announced it would levy tariffs on $60 billion of imports from China. The administration also said it would limit U.S. technology transfers to Chinese companies. China requires foreign companies who want to sell products in China to share their trade secrets with Chinese companies. China responded by announcing tariffs on $3 billion in U.S. fruit, pork, recycled aluminum, and steel pipes.

On March 26, 2018, the Trump administration began quietly negotiating with Chinese trade officials. The administration focused on three requests. It would like China to reduce its tariffs on U.S. automobiles. It wants China to import more U.S. semiconductors. American companies also want greater access to China’s financial sector.

On April 3, 2018, the Trump administration announced it might impose tariffs on $50 billion in Chinese imported electronics, aerospace, and machinery. China retaliated hours later. It announced 25 percent tariffs on $50 billion of U.S. exports to China. These also won't go into effect immediately. China's tariffs strategically targeted 106 products. China also penalized two other U.S. exports: sorghum and Boeing airplanes. It targeted industries located in states that supported Trump in the 2016 election.

 

Shortly afterward, China canceled all U.S. soybean import contracts. China imports $12 billion in U.S. soybeans. China needs soybeans to feed pigs, its primary meat staple. But China can replace U.S. beans with those from Brazil. U.S. farmers sell one-half of their crop to China. If that market disappears, it will hurt the United States more than China. In July 2018, soybean prices hit a 10-year low as analysts predicted oversupply.

On April 6, 2018, Trump said he might impose tariffs on $100 billion more of Chinese imports. It would cover just one-third of U.S. imports from China. If China retaliates, that would impose tariffs on all U.S. exports to China. 

On April 10, 2018, China announced that trade negotiations had broken down. The United States demanded that China stop subsidizing the 10 industries prioritized in its "Made in China 2025" plan. These include robotics, aerospace, and software. China also plans to be the world's primary artificial intelligence center by 2030. Later that day, Chinese President Xi Jinping announced he would reduce tariffs on imported vehicles. Although it allowed Trump to save face, it wouldn't affect trade very much.

Most automakers find it is cheaper to build in China, regardless of tariffs. Other promises, such as reducing restrictions on foreign direct investment, are not new. 

On May 4, 2018, the Trump administration presented China with five demands. It asked China to:

  1. End subsidies to tech companies.
  2. Stop stealing U.S. intellectual property.
  3. Cut tariffs on U.S. goods by 2020.
  4. Open China to more U.S. investment.
  5. Reduce the trade deficit by $200 billion by 2020.

China is unlikely to comply with the first two demands. They are at odds with China's goal of becoming a tech leader. On the other hand, China does want to reduce its trade deficit. China's economic reform plan is to become less reliant on exports. On May 10, China agreed to import more U.S. products.

On May 15, China agreed to remove tariffs on U.S. pork imports. It will also allow Qualcomm to acquire NXP. In exchange, the United States will remove tariffs on Chinese telecom company ZTE.

This agreement supports a mercantilist philosophy. It promotes specific industries that are important for the leaders' political purposes. Pork growers tend to vote Republican, which is why China targeted their exports. The telecom industry is part of China's growth strategy, which is one reason why Trump imposed tariffs. The other is that the company violated U.S. sanctions against Iran and North Korea. On June 12, the Senate blocked Trump's deal. 

Many countries see Trump's removal of tariffs on ZTE as a weakness they could exploit. They will redouble efforts to find exceptions to Trump's tariffs. Many European countries want to avoid U.S. sanctions on Iran. They may threaten tariffs on U.S. imports as a bargaining tool.

On May 29, the Trump administration said it would announce by June 15 a final list of products to receive tariffs. It will first target $50 billion in imports from China. By June 30, it would announce investment restrictions on Chinese acquisition of U.S. technology.

On July 6, Trump's tariffs went into effect for $34 billion of Chinese imports. China levied a 40 percent tariff on U.S. autos. It could threaten the exports of American-made cars that employ thousands of works in the South. Tesla announced it will build a factory in Shanghai to avoid the tariff.

China will also levy tariffs on U.S. agricultural exports. Midwest farmers could be stuck with excess produce and livestock. On July 24, 2018, Trump announced he would offer $12 billion in subsidies to American farmers. On August 27, the administration announced a $4.7 billion bailout. It may make a second payment in December if it's still needed. But corn growers alone said their costs top $6 billion.

On July 10, 2018, the Trump administration announced it might impose 10 percent tariffs on another $200 billion of Chinese imports. They will go into effect on September 24, weeks before the 2018 mid-term elections. The tariffs will rise to 25 percent by the end of the year. They will raise prices on an variety of consumer goods, including fish, luggage, tires, handbags, furniture, apparel, and mattresses.

China will retaliate by adding tariffs on $60 billion in U.S. exports. In response, Trump threatened to add tariffs until all $500 billion of Chinese imports are affected. That could reduce economic growth by 0.75 points in 2018. It could also threaten U.S. shale oil exports. China buys 20 percent of U.S. oil exports.

On August 2, 2018, the administration announced a 25 percent tariff on $16 billion worth of Chinese goods. It went into effect on August 23. It applies to industrial equipment like tractors, plastic tubes, and chemicals. In response, China announced a 25 percent tariff on $16 billion worth of U.S. goods, including autos and coals. It went into effect the same day.

Causes of U.S. Trade War with China

U.S. politicians have long threatened a trade war with America's largest trading partner in goods. A trade deficit occurs when exports are less than imports.

In 2017, the United States exported $130 billion to China. The three largest export categories are aircraft at $16 billion; soybeans, $12 billion; and automobiles, $11 billion. U.S. imports from China were $506 billion. Most of it is electronics, clothing, and machinery. But a lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. As a result, tariffs hurt U.S. corporations as well as foreign ones.

 

China is the world's No.1 exporter. Its comparative advantage is that it can produce consumer goods for lower costs than other countries can. China has a lower standard of living, which allows its companies to pay lower wages. American companies can't compete with China's low costs, so it loses U.S. manufacturing jobs. Americans, of course, want these goods for the lowest prices. Most are not willing to pay more for "Made in America."

How It Affects You

The trade war is already increasing the prices of consumer goods that use steel and aluminum. Domestic manufacturers that rely on imported raw materials or parts are reacting to higher costs. Since their profitability is lower, their only other choice is to slash jobs. Soda and beer suppliers are the first to raise prices.

The tariffs give a competitive advantage to domestic producers of that product. Their prices would be lower by comparison. As a result, they would receive more orders from local customers. As their businesses grow, they would add jobs.

But Alliance of Automobile Manufacturers warned that even U.S.-produced steel will cost more once cheap foreign imports are eliminated. The move is "threatening the industry’s global competitiveness and raising vehicle costs for our customers."

Many U.S. industries were affected soon after Trump announced the tariffs. Mid-Continent Nail in Missouri announced layoffs because steel prices are now too high for them to remain profitable. Harley-Davidson announced it would move some production abroad to avoid retaliatory EU tariffs. The Maine lobster industry will suffer from Chinese retaliatory tariffs on U.S. seafood. California cheese makers are already seeing their markets in China and Mexico disappear due to retaliatory tariffs. Wisconsin auto parts manufacturers and the U.S. bourbon industry are other industries being punished.

Many U.S. imports from China originated in the United States. Raw materials are sent to China for processing, then exported back into America. An example is salmon caught in Alaska and sent to China for processing, then sent back to U.S. grocery shelves. If Trump imposes tariffs on seafood imports, it will raise prices by 25 cents to 50 cents a pound.

Foreign tariffs on U.S. exports will make them more expensive. U.S. exporters may have to cut costs and lay off workers to remain competitively priced. If they fail, they may cuts costs further or even go out of business. 

In the long term, trade wars slow economic growth. They create more layoffs, not fewer, as foreign countries retaliate. The 12 million U.S. workers who owe their jobs to exports could get laid off.

Consultant Oxford Economics predicted the trade war could cost the global economy $800 billion in reduced trade. That could slow growth by 0.4 percent. It's occurring at the same time that oil prices and interest rates are rising.

Over time, trade wars weaken the protected domestic industry. Without foreign competition, companies within the industry don't need to innovate. Eventually, the local product would decline in quality compared to foreign-made goods.