13 Jul, 2018 Trump’s trade war with China is about to get very real for millions of Americans
President Donald Trump’s escalating trade war with China could very quickly get very real for millions of Americans.
Trump’s tariffs on Chinese goods have so far mostly spared US consumers, focusing instead on industrial materials such as bulldozers or large factory equipment. While those costs are likely to indirectly hit average Americans, Trump’s latest proposal – which would place tariffs on $US200 billion worth of Chinese exports to the US – would hit much closer to home.
The list, released Tuesday, could add 10% duties on consumer goods including TVs, leather handbags, buttons, and basic groceries.
The Office of the US Trade Representative, which put out the list and would be responsible for implementing and executing the tariffs, said it “took account of likely impacts on US consumers, and involved the removal of subheadings identified by analysts as likely to cause disruptions to the US economy.”
But Lewis Alexander, the chief US economist at Nomura, said the sheer scope of the newly proposed tariffs – in which just under half of US imports from China are subject to levees – meant the Trump administration could not avoid slamming American households with price increases.
“The new list, targeting $US200 billion with a 10% tariff, is almost equally split between capital and consumer goods,” Alexander wrote in a note to clients. “Thus, if these tariffs do indeed take effect, there would likely be a larger impact on consumers than in the initial round.”
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said this new focus on everyday goods would result in inflation, or price increases, on the consumer price index.
“The consumer goods subject to the new tariffs together account for almost 6% of the core CPI,” he said. “Assuming no supply-chain margin compression – there will be some, initially – that means 10% tariffs would boost the index by up to 0.6%.”
A 0.6% increase in the CPI index would be substantial, as it would raise inflation by 0.6 percentage points, or 30% of the Federal Reserve’s 2% target.
Warning signals have already suggested the new US tariffs could cause prices to soar. Trump hit imported washing machines with a 20% tariff earlier in the year, and Thursday’s latest reading of the consumer price index shows a sudden skyrocketing cost.
“Laundry equipment products, which were subject to new tariffs starting in February, saw prices increase another 1.8% in June; over the past three months laundry equipment prices are up a cumulative 19.9%,” said Michael Feroli, a JPMorgan economist.
While Trump’s latest tariff proposal applies only 10% duties to Chinese goods, US consumers would be subject to significant price pressures if the new restrictions result in even a small portion of the inflation seen in washing machines.
Substitutes could help combat inflation
Analysts have exhibited some hope that price increases could be muted by simply shifting market share to imports from other countries.
For instance, if only 15% of US imports of a particular good come from China, it shouldn’t be too hard for businesses to import more from other countries and replace those Chinese items with tariff-free goods.
Deutsche Bank’s chief China economist, Zhiwei Zhang, said there were “many other trading partners that US can switch to” for a good portion of the items on Trump’s newest list, which could give consumers some relief. But Zhang said some disruptions simply couldn’t be avoided.
“For leather products, furniture, TV and monitors, China’s market share in US imports are high (53.6%, 57.4% and 69.3% respectively) so the substitution process may not be smooth,” Zhang wrote in a note to clients.
Relying on substitute products does pose risks, however, as pointed out by Shepherdson. If another country sees demand for its products increase because of a shift away from China, those producers could respond to the increased demand with their own price increases.
“Domestic manufacturers will raise their prices when tariffs lift the price of Chinese imports, as will third-country suppliers of these items, such as Vietnam, Bangladesh, and Indonesia,” Shepherdson said. “They won’t want immediately to give up the competitive advantage offered by the tariffs on Chinese-made goods, but the lure of wider margins will prove irresistible.”
As an example, the economist pointed once again to washing machines, where manufacturers that were not subject to the tariffs matched the price jumps.
“Note that since the US imposed 20% tariffs on imported Samsung and LG washing machines in late January, the CPI laundry equipment index has jumped by 10%, even though the market share of these two firms, before the tariffs, was only about 30%,” he said.