Trade Wars and their Effect on the Economy and 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 its domestic industry and create jobs. In the short run, it may work. Tariffs are supposed to 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 in the long run, a trade war costs jobs. It depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.

The 1930 Smoot-Hawley Tariff was a trade war that worsened the Great Depression. It increased 900 import tariffs by an average of 40% to 48%.

Smoot-Hawley was designed 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. The trade war reduced international trade by 65%. It turned a recession into a depression and contributed to the start of World War II.

Trump's Trade Wars

President Donald Trump wants to reduce the $621 billion U.S. trade deficit. It’s been the world’s largest since 1975. Reducing the deficit is part of Trump’s strategy to create more jobs.

Most of the U.S. deficit results from American enthusiasm for imported consumer products and automobiles. In 2018, the United States imported $648 billion in drugs, televisions, clothing, and other household items. It only exported $206 billion of these consumer goods. That alone added $442 billion to the deficit. America imported $372 billion worth of automobiles and parts, while only exporting $159 billion. That added another $214 billion to the trade deficit. 

In early 2018, Trump said, "Trade wars are good and easy to win." He has initiated three: a global tariff on steel, a tariff on European autos, and tariffs on Chinese imports.

After Trump’s announcement, global stock markets tumbled in fear of a trade war between the world's three largest economies. In late 2018, several U.S. companies formed "Tariffs Hurt the Heartland.” They are hurt by the rising costs of imported materials.

The Federal Reserve estimates Trump's tariffs are costing the average American household $1,245 a year. This includes higher prices and lost economic growth.

In August 2019, Goldman Sachs warned that the trade war could spark a recession. It's already lowered gross domestic product by 0.6%.

Farmers suffer from retaliatory tariffs imposed by China and Europe on their exports. In the farm belt of Illinois, Indiana, and Wisconsin, bankruptcies have risen to their highest level in a decade. In 2017, those states produced half of all U.S. food. Nationally, farmers’ income fell by $11.8 billion between January and March 2019. That’s the most since 2016.

On May 23, 2019, Trump gave farmers $16 billion in aid to partially compensate for their losses. He gave them $12 billion in 2018.

Other countries are forming trade agreements that exclude the United States. In April 2018, the EU upgraded its agreement with Mexico, removing almost all tariffs. In July 2018, the EU signed an agreement with Japan that reduces or ends tariffs on almost all goods. It's the largest bilateral trade agreement in existence, covering $152 billion in goods.

Steel Tariffs

On March 8, 2018, Trump administration announced a 25% tariff on steel and a 10% tariff on aluminum imports. It said that dependence on imported metals threatens America’s ability to make weapons. The Aerospace Industry Council said Trump's tariffs would raise the military’s costs instead. 

The U.S. Congress is the only body authorized to impose tariffs. But in 1962, it allowed the president to curb imports that threatened national security. The World Trade Organization can't adjudicate trade disputes that involve security.

America is the world's largest steel importer, thanks to users like automakers. Steel importers employ 6.5 million workers compared to 147,000 workers in the U.S. steel industry. Tariffs lowered second-quarter profits for the big three automakers. To satisfy shareholders, they passed those costs onto consumers. Costs from tariffs have already outweighed any benefits of Trump's tax plan.

Eight countries filed complaints with the World Trade Organization. Six of them - Canada, India, and Mexico, the European Union, Norway, and Switzerland - pointed out they are allies. The other two complainants are China and Russia.

On March 26, 2018, Trump exempted South Korea, Argentina, Australia, and Brazil from the steel tariff. South Korea agreed to double its import quota for U.S. cars. It allowed the United States to keep its 25% tariff on pickup trucks for an additional 20 years.

After the June 11, 2018, G7 meeting, Canadian Prime Minister Justin Trudeau said Canada would retaliate with tariffs. Mexico announced tariffs on flat steel, lamps, and pork products. 

On May 17, 2019, Trump agreed to lift the tariffs in 48 hours on steel imports from Canada and Mexico. In return, they will prevent Chinese steel from being shipped from their countries to the United States.

Tariffs Against Mexico

On June 4, 2019, Trump threatened to impose a 5% tariff on all imports from Mexico effective June 10. He wants the government to reduce the number of asylum-seekers presenting themselves at the U.S.-Mexico border. He promised to raise the tariff to 25% if needed to force Mexico to act.

The tariff would be in violation of NAFTA. Trump said he can override the trade agreement by declaring a national emergency. Republicans, who have supported the president, are threatening to oppose this latest action.

U.S. - China Trade War Major Events Timeline

By far, the largest U.S. trade deficit by country is with China. In 2018, the U.S. trade deficit with China was $419 billion. The United States imported $540 billion, primarily in computers, cell phones, and apparel. Much of this is manufactured in China by U.S. companies but is still considered imports. The U.S. companies exported $120 billion to China. Most of this was commercial aircraft, soybeans, and autos.

In addition to reducing the trade deficit, Trump wants to limit U.S. technology transfers to Chinese companies. China requires foreign companies who want to sell products in China to share their trade secrets. The administration has also asked China to 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. China is unlikely to agree to those demands.

The Trump administration has imposed three tariffs on a total of $250 billion in Chinese imports. The Federal Reserve estimated these tariffs cost the average household $419 per year.

On May 20, 2019, Trump imposed a fourth tariff. He raised tariffs to 25% on $200 billion worth of goods. The Fed estimated it would cost the average household $831 a year. Trump is increasing the pressure on trade talks that are underway.

Trump threatened to expand that tariff to an additional $325 billion of Chinese imports. That would raise prices on basically all Chinese imports. On June 29, 2019, Trump delayed the proposed tariffs to encourage renewed trade talks with China.

On June 1, 2019, China retaliated with a 25% tariff on $60 billion of U.S. goods. Some investors are also worried China may sell some of its $1.1 trillion in U.S. debt. That would send interest rates higher and slow the U.S. economy.

On August 13, 2019, Trump threatened a 10% tariff on Chinese electronics and clothing. The tariff would start on December 15 to limit damage on the holiday shopping season. But the tariff would begin on September 1 on other items.

Previous Tariffs

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.

On March 8, 2018, Trump asked China to develop a plan to reduce the trade deficit by $100 billion. China's economic reform plan includes reducing its reliance on exports. But it said it can’t stop Americans from demanding low-cost Chinese goods.

On March 22, 2018, the administration announced tariffs on $60 billion of Chinese imports. It said China uses cybertheft, espionage, and government pressure to obtain leading-edge technology. On March 23, China announced tariffs on $3 billion of U.S. fruit, pork, recycled aluminum, and steel pipes.

On March 26, 2018, the administration began negotiations with China. It asked China to reduce tariffs on U.S. automobiles, import more U.S. semiconductors, and grant greater access to its financial sector.

On April 3, 2018, the administration threatened a 25% tariff on $50 billion in Chinese electronics, aerospace, and machinery. Hours later, China announced 25% tariffs on 106 U.S. exports. On April 18, China penalized two other U.S. exports: sorghum and Boeing airplanes. It targeted industries located in states that supported Trump in the 2016 election. It lifted the sorghum tariffs on May 18.

On May 2, 2018, China canceled all U.S. soybean import contracts. China imported $12 billion in U.S. soybeans to feed pigs, its primary meat staple. It replaced U.S. beans with those from Brazil. U.S. farmers sold one-half of their crop to China. As that market disappeared, it hurt the United States more than China. In July 2018, soybean prices hit a 10-year low as analysts predicted oversupply.

On April 5, 2018, Trump threatened tariffs on $100 billion more of Chinese imports. It would cover just one-third of U.S. imports from China. If China retaliated in kind, it would slap levies on all U.S. exports to China. 

On April 10, 2018, China announced it would reduce tariffs on imported vehicles. But most automakers find it’s cheaper to build in China, regardless of tariffs.

On May 4, 2018, the administration asked China to reduce the trade deficit by $200 billion and cut tariffs on U.S. goods by 2020. It asked China to end subsidies to tech companies, stop stealing U.S. intellectual property, and become open to more U.S. investment.

On May 15, 2018, China agreed to allow Qualcomm to acquire NXP. In exchange, the United States would 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.

The telecom industry is part of China's growth strategy, which is one reason 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 21, 2018, China agreed to cut tariffs on U.S. auto imports from 25% to 15%. It would go into effect July 1.

On May 29, 2018, the administration said it would target $50 billion in imports from China. It would also restrict Chinese acquisition of U.S. technology.

On July 6, 2018,  U.S. tariffs went into effect for $34 billion of Chinese imports. China retaliated with a 40% tariff on U.S. autos. Tesla announced it will build a factory in Shanghai to avoid the tariff. China also announced tariffs on U.S. agricultural exports.

Midwest farmers have been 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. Corn growers alone said their costs top $6 billion.

On July 11, 2018, the administration announced 10% tariffs on another $200 billion of Chinese imports. They went into effect in mid-September 2018, weeks before the 2018 midterm elections. The U.S. also threatened 25% tariffs after January 1, 2019, on a variety of consumer goods, including fish, luggage, tires, handbags, furniture, apparel, and mattresses.

China threatened to 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 have reduced economic growth by 0.75 points in 2018. It might have also threatened U.S. shale oil exports. China buys 20% of U.S. oil exports.

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

On September 18, 2018, the administration announced tariffs on $200 billion of Chinese imports. A 10% tariff would launch on September 24, 2018. It would increase to 25% on January 1, 2019. The tariffs were imposed on 5,745 items. They encompassed a wide range of electronics, food, tools, and housewares.

On December 1, 2018, President Trump met with China's President Xi Jinping at the G-20 Conference. Trump agreed to delay the 25% tariff increase from January 1, 2019, to March 1, 2019. Negotiators planned to cover 142 issues. These included the protection of intellectual property, technology, and cybersecurity, as well as currency, agriculture, and energy.

On December 11, various federal agencies said they would condemn China for stealing U.S. trade secrets and technologies. The Justice Department would indict hackers who broke into U.S. networks. Later that day, China agreed to roll back some auto tariffs raised earlier in. It also agreed to reinstate some purchases of soybean imports and allow U.S. firms greater access to Chinese industries.

On January 18, 2019, China agreed to increase its purchases of U.S. exports and reduce the trade deficit.

On February 27, 2019, the administration dropped the threat of imposing the 25% tariff. It was originally scheduled to begin January 1, then moved to March 1, then dropped.

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.

Half of all Chinese imports are goods used by U.S. manufacturers to make other products. They send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. The tariffs raise their costs, forcing them to either raise prices or lay off workers.

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.

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."

Trade War With the EU

On March 7, 2018, the EU threatened a 25% tariff on U.S. exports such as cranberries, Harley Davidson motorcycles, blue jeans, and bourbon. Trump delayed the steel tariff until May 1, 2018.

On April 21, 2018, the EU upgraded its trade agreement with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.

On May 1, 2018, Trump announced he would delay the steel tariff against the EU until June 1, 2018. He wanted the U.S. ally to cut its 10% tariff on U.S. autos. He also asked the EU to set quotas on its steel exports. 

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

On June 21, Germany proposed to end the EU's 10% tax on U.S. auto imports if Trump forgot about imposing a 25% tax on European auto imports. There is already a 25% U.S. tariff on light trucks.

On June 22, the EU retaliated to the steel tariffs with tariffs on $3.2 billion of American products. It targeted imports that will impact Trump’s political base. Examples of these taxable imports are bourbon, motorcycles, and orange juice.

On July 17, 2018, 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 steel and aluminum tariffs, and work toward zero tariffs on non-auto industrial goods. The EU agreed to import more U.S. liquefied 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.

On April 15, 2019, the Trump administration announced it would impose tariffs on $11 billion in European imports. It wants to force the EU to end subsidies for aircraft manufacturer Airbus. The tariffs could raise prices on imported cheese, bicycles, and kitchen knives.

How It Affects You

The trade war has raised the prices of consumer goods that use steel and aluminum. Soda and beer suppliers were the first to raise prices. Costs have increased on imported clothes hangers, heavy-equipment materials, and computer chip and tool makers.

The Alliance of Automobile Manufacturers warned that 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."

For example, Mid-Continent Nail in Missouri announced layoffs because steel prices became 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. Tariffs have also slowed U.S. timber and grain exports, according to The Wall Street Journal.

In October 2018, several companies forecast how much tariff-related costs will hurt in 2019:

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. 

The Bottom Line

A trade war may improve a nation’s trade deficit in the short run but it could cost warring nations their economic growth in the long term. The United States is currently engaged in a trade war with China, the EU, Mexico, and Canada. Because of this, the affected countries have signed new trade agreements with other countries and have left America out of the loop.

President Trump’s attempts at trade protectionism have already hurt the U.S. economy. They raised the prices of automobiles, computer chips, soda and beer, and heavy equipment. Companies have cut jobs because the cost of production with local materials is prohibitive. U.S. exporters of agricultural products, bourbon, cheese, and auto parts are suffering as foreign markets disappear under retaliatory tariffs. Trump must resolve the trade war soon before it wreaks serious damage on the U.S. economy.