Trade Wars and How They Affect You

How Global Trade Wars Raise Prices

Trump and Xi Jinping
••• U.S. President Donald Trump takes part in a welcoming ceremony with China's President Xi Jinping on November 9, 2017 in Beijing, China.  Photo by Pool/Getty Images

A trade war is when a nation imposes tariffs 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.

Trade war tariffs always increase the prices of all imported goods.

Trump's Trade War

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

 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 industries that need steel. It will also raise costs for steel users, like automakers. They'll pass those costs onto consumers.

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,  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 the NAFTA renegotiations were finalized. Canada is the largest source of U.S. steel imports. Mexico is the fourth largest. 

against the European Union until June 1, 2018. He wants 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, 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.”

The  on $3.5 billion worth of U.S. exports. European Commission President Jean-Claude Juncker warned, “We will put tariffs on Harley-Davidson, on bourbon and on blue jeans — Levi’s.” On April 21, 2018, the  with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.

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 June11 G7 meeting, Canadian Prime Minister Justin Trudeau said Canada would retaliated with tariffs.

The head of the  said Trump's trade war could . He included the possibility of Trump dumping the North American Free Trade Agreement.

Trump used a 1962 Congressional power that allowed a president to curb imports that . The Commerce Department reported that dependence on imported metals threatens the . But the  Trump's tariffs would raise costs for the military and exporters. The tariffs could also threaten national security by dampening economic growth.

A strong economy is necessary to increase U.S. military spending.

U.S. Trade War with China

On January 22, 2018, President Trump  on imported Chinese solar panels and washing machines.  China is also 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.

On March 8, 2018,  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 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.  on $3 billion in U.S. fruit, pork, recycled aluminum, and steel pipes.

On March 26, 2018, the 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 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, 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. 

On April 6, 2018, s 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, that trade negotiations had broken down. The United States demanded that China stop subsidizing the 10 industries prioritized in its "" plan.  These include robotics, aerospace, and software. China also plans to be the world's primary artificial intelligence center by 2030.  Later that day, 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 with a list of demands. It asked China to :

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

These demands 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,  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 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 Trump's deal. 

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, 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.

Causes of U.S. Trade War with China

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

In 2017, the United States exported $130 billion to China. The  are aircraft ($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

A trade war would raise prices for imported products right away. Costs would rise by the same amount as the imposed tariff. It would 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 business grew, they would add jobs.

On the flip side, domestic manufacturers that rely on imported raw materials or parts would see higher costs. It would cut into their profitability. They would either have to raise prices, slash jobs, or both. 

The 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."

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 would get laid off.

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.