The trade war is escalating. On top of the tariffs placed on billions of dollars worth of imports from China earlier this year, President Donald Trump has added a 10% tax on another $200 billion worth of Chinese products, in effect as of Sept. 24, and is planning to raise the tax to 25% Jan. 1, 2019.
Some of the goods on the hit list: luggage, seafood, fruit, furniture, baseball gloves, network routers, industrial machinery parts…clearly, a range of stuff. That means this issue stands to affect pretty much all of us, making shopping more expensive this season.
China has already retaliated with tariffs of 5% to 15% on $60 billion of U.S. goods from chemicals to clothes and auto parts, and pulled out of scheduled trade talks, escalating tensions even more.
Back up. What’s a tariff again?
It’s a special tax on specific imported goods and services, making them cost more.
Can we do that?
Yep. In fact, tariffs have been used by the U.S. (and many other countries) throughout history to control the amount of imported goods and services coming into the country—often to protect U.S. industries from foreign competition—and to punish other countries that have crossed us.
Trump says he is using tariffs to punish China and other countries for treating the U.S. unfairly in terms of trade. He expects that by raising these taxes on imports, American consumers will be discouraged from buying them and instead look for less costly domestic alternatives, which would effectively lower revenues for the exporting countries and help boost sales of U.S.-made goods.
How’s that working out?
TBD. Dozens of domestic farmers, ranchers and U.S. companies have complained that the retaliatory tariffs imposed on U.S. goods have hurt them. (The Trump administration has said it plans to give U.S. farmers and ranchers hurt by the trade war $12 billion in relief to mitigate the impact of tariffs on their exports.) Companies like Harley-Davidson HOG, +1.13% General Motors GM, +1.34% and General Electric GE, +11.69% and several others, have seen profits hit by tariffs, too. On the other hand, U.S. steel companies have seen demand, and profits, rise from Trump’s 25% steel tariffs on imports.
Also see: Trade-war tracker: Here are the new levies, imposed and threatened
The latest round of tariffs had been on the table since the last shots were fired, so investors knew they were coming. That, along with the general strength of the U.S. economy, helps explain why Wall Street has mostly shrugged off this trade war for now. (Although the market did fall from recent highs after the latest round of tariffs went into effect on Sept. 24.)
History shows that trade wars aren’t typically so simple, though, and can carry big risks. The last time we were in a similar situation was 2002, when President George W. Bush imposed tariffs in an effort to lift the U.S. steel industry, raising rates from up to 1% to between 8% and 30%. The results? Disaster.
“We found there were 10 times as many people in steel-using industries as there were in steel-producing industries,” said Sen. Lamar Alexander (R-Tenn.), warning President Trump in March about the possible negative effects of his then-proposed tariffs. “They lost more jobs than exist in the steel industry.”
As for a worst-case scenario? The biggest trade war in history kicked off in 1930 with the signing of the Smoot-Hawley Tariff, which levied taxes averaging more than 45% on nearly 900 items imported from many other nations. It led to retaliatory measures by at least two dozen other countries and was blamed for worsening the effects of the Great Depression—and even for contributing to the rise of political extremism that helped leaders like Adolf Hitler gain power.
Of course, the world is a different place now than it was in 1930 and even 2002. Still, economists and trade experts agree that the current policies could be dangerous for America. For one thing, the global economy is more interdependent these days, making an “America First” approach challenging.
What does this all mean for me?
Higher costs on products across the board. (Walmart WMT, +0.38% and Target TGT, +0.51% have both warned the latest tariffs could lead to increased prices for customers.) On the bright side, since the latest round of tariffs are being phased in—not rising to 25% until 2019—you have some time to adjust your budget, and your holiday shopping won’t get hit by the highest rates. Plus, about 300 products have been removed from the original tariff list released in early July, including smartwatches, Bluetooth devices, bicycle helmets, high chairs and car seats.
See: Walmart, Target warn that tariffs will raise prices and hurt families
But if Trump makes good on threats of tariffs on an additional $267 billion worth of Chinese imports—which would effectively cover nearly all the products China sells to the U.S.—other Apple products, including the iPhone, may still get pricier. In fact, one way China may retaliate (it’s running out of tariff options, given that it imports far less from the U.S. than it exports here) is by making it harder for U.S. companies in China, such as Apple, to do business there. So the trade war poses a double threat against Apple AAPL, +1.39% and its customers.
What happens next?
Unclear. The White House says the ball is in China’s court: “I urge China’s leaders to take swift action to end their country’s unfair trade practices,” said President Trump in a statement. “Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.”
However, experts say that China can do little to appease the current administration. “The principal objective of the tariffs is probably not to bring Beijing to the bargaining table,” said Arthur Kroeber, a senior analyst at research firm Gavekal, in a note, as reported by CNN. “Rather, it is to force U.S. multinational companies to pull back their investments in China, so that the interdependence of the two rival economies is reduced.”
Read: California’s ‘golden’ economy could be tarnished by Trump tariffs, high cost of living
Unfortunately, those multinationals are also not giving Trump what he wants at this point. Only 6% of the members of the American Chamber of Commerce in China say that they’d consider moving their operations back to U.S. soil due to the current trade dispute.
Meanwhile, American businesses and consumers are left to cope with the higher costs.
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