May 13, 2019
As you know, Tom, the U.S. and China have been engaged in an escalating trade battle since last year. In September, the U.S. imposed 10% tariffs on $200 billion worth of goods imported from China, with tariffs rates set to rise to 25% on January 1, 2019. China then retaliated. In the wake of this tit-for-tat, negotiators from both countries launched trade negotiations, and the January tariff hike was postponed. However, those talks broke down last week, and President Trump raised duties to 25% while announcing the U.S. would consider imposing tariffs on the remaining $325 billion worth of goods from China.
Tariffs are simply a tax on goods imported into the United States. Just like sales tax, tariffs are set as a percentage of the value of any given good. So, when companies or individuals buy goods subject to tariffs, they will have to pay that amount on top of the value of the goods when they enter the United States. Countries impose tariffs for a few reasons: to raise income, to give domestically produced products an advantage, and to penalize a country by making its products more expensive. One thing is certain when it comes to tariffs: higher tariffs mean higher prices.
Many reports have suggested that President Trump went this route following a decision by China to call for substantial changes to the negotiating text that both countries had been using as a blueprint for a deal. Specifically, China had removed language in the draft agreement that would have committed the country to change its laws relating to the theft of U.S. intellectual property and trade secrets, the forced transfer of certain technologies to domestic Chinese firms, and currency manipulation, among other items. The president and U.S. trade negotiators believe that any agreements on these measures and others must be legally binding, and after the changes were made, talks hit a wall.
While American consumers have been affected by the past two tariff hikes on Chinese goods, this round of duties will hit our pocketbooks much harder, Tom. The reason? Past hikes have been designed to shield consumers, focusing instead on goods used to make finished products and exemptions for important consumer items such as clothing and children’s products. However, this latest round does not contain these exclusions, and the additional 15% tariffs will certainly drive up ticket prices. The administration increased to 25% the tariffs on a wide swath of household goods. Everything from pet toys to food, power tools to furniture is subject to these new duties and will get more expensive. The prices of consumer electronics and auto parts in particular are expected to shoot up. At the end of the day, these tariffs will cost every American money.
Great question, Tom. While prices are certain to go up, consumers are unlikely to see prices rise by 25%. This is because retailers will try to absorb or redistribute some of the cost increase. We saw this is in January 2018, when the administration levied a 20% duty on washing machines. According to The Wall Street Journal, prices of both washing machines and dryers rose by about 12%, because appliance manufacturers spread the cost increase across both items.
That remains unclear, Tom. U.S. and Chinese officials both said they continue to seek a trade deal. But at this point, there are no talks scheduled and the tariffs remain in place. If China retaliates for this latest round of U.S. tariffs, it could very well inflict more pain on U.S. manufacturers and farmers, and slow the U.S. economy. Let’s hope this trade battle gets resolved, for the sake of consumers and the economy as a whole.
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