Then, on June 14, Trump announced he’d be putting a 25% tariff on $50 billion worth of Chinese goods. Less than a week later, in response to tariff threats from China, Trump announced he’d put tariffs on an additional $200 billion of Chinese goods if China followed through with their own tariff threats.
Though these percentages are less than Trump talked about during his campaign, they’re still significant. On one side, the tariffs could result in increased jobs, economic growth and more American-made products. But they could also lead to job losses, increased costs for consumers and maybe even a trade war. The question is, does the good outweigh the bad?
What is a Tariff (and How Does it Work)?
A tariff is a tax that’s placed on foreign goods that are imported into a country. For example, let’s say you were a company in England and you sold bubble gum.
Your customers in England love bubble gum, and you saw there was a high demand in other countries for gum–such as the United States. Companies in the United States were pricing bubble gum way too high–mostly due to the cost of labor, as paying workers in the U.S. is much more expensive than in other countries.
You see the gum is selling for $2 in the United States. You determine that you can manufacture, export, and sell bubble gum to customers in the United States for $1.50–50 cents less than most U.S. companies. So, you do.
This causes U.S. companies to scramble. Most of them have to lay off workers to cut costs to compete. They start creating new and innovative ways to produce bubble gum at a lower cost to compete with you. This constant competition continues to drive the price down further and further until the bubble gum industry in the U.S. is a fraction of what it used to be.
At this point, the U.S. decides to impose a tariff (or tax) on the import of bubble gum. The goal is to make it more expensive for foreign countries to send their gum to the U.S., so U.S. companies can become competitive again, hire more people and regrow the now dying industry.
The tariff is 25%. This means that for every $1.50 pack of gum you’re importing, you’re paying a 25% tax on top of that. So to import that $1.50 pack of gum, you’re giving the U.S. about 38 cents ($1.50 x 0.25 = .375).
Suddenly, this slashes your profit margins, and it’s no longer as profitable to export bubble gum to the United States. So you can either pay up, not export gum or retaliate by imposing your own tariff on the United States–which is what leads to a trade war.
What is a Trade War?
A trade war is when one country retaliates against another in an attempt to restrict or stop the trade from that country. This is usually done by imposing tariffs. In an extreme example, if everyone imposed tariffs on one another (so high that it became unaffordable to export those goods to that country), everyone would stop importing and exporting, which would cause an economic ripple effect.
Here’s a great video by Vox that explains trade wars and their impact, using Game of Thrones lingo:
Why Did Trump Impose These Tariffs?
Trump believes that the United States is being treated unfairly by other foreign countries when it comes to trade. Specifically, with China, his tariffs are primarily the result of his belief that Beijing stole intellectual copyrights. The United States also has a massive trade deficit (when we import more than we export) and he believes tariffs can help reverse that.
Finally, Trump believes that imposing these types of tariffs will help revive dying industries in the United States, like the steel industry. Since, in theory, less product would be coming in from overseas, more would be produced locally, thus expanding company growth and employment in the industry.
Will Other Countries Retaliate?
We are seeing that happening.
At the end of May, Canadian Foreign Minister Chrystia Freeland emphasized that Canada would strike back against the United States with dollar-for-dollar tariffs. The country will implement retaliatory tariffs on steel, aluminum, and other products.
China immediately retaliated against Trump’s tariffs, saying they’ll also impose a 25% tariff on nearly 700 goods from the United States, totaling about $50 billion. This week, Turkey announced it’s plans for tariffs on U.S. goods worth $267 million. And the latest response–the European Union is ready to put tariffs on $3.4 billion American products.
As the back and forth tariff threats continue (Trump is pushing to impose a new 25% tariff on foreign cars as well) things will become more and more interesting to watch.
What Does All of This Mean For Me – the Consumer?
This is a point of contention amongst global experts. Many feel that there will be a significant impact on consumers’ wallets and their economic choices, but many don’t. While this is all speculative, here are some potential pros and cons to these tariffs.
Pro: Increased Jobs and Economic Growth
Part of the reason Trump is doing this is to revive industries that were washed out in the United States due to foreign competition. The steel industry was at its peak in America after World War II, accounting for more than 50% of the world’s steel in the 1940s. In the late 1940s and into the late 1950s, the steel industry averaged about 700,000 employees. Today that number is just over 80,000–close to a 90% reduction.
Tariffs on foreign steel, for instance, would provide more incentive to produce steel in the United States again, increasing the need for labor and steel mills. It probably wouldn’t hit the production levels we saw after the war, but theoretically it could change the landscape of an industry like this, creating more jobs and more economic growth.
Pro: More American-Made Products
With foreign products being taxed so heavily, this would increase the frequency by which you’d see American-made products. Consumer Reports said in the past that about 80% of Americans would prefer to buy American-made products, while over 60% said they’d pay more for American-made products. Regardless of why, if this holds true, you’d see an uptick in spending locally, more locally-made products, higher quality products, and more economic growth.
You may see people driving more American-made vehicles, drinking more American beer, or working at a company that produces products primarily sold to Americans. General Electric, for example, has invested upwards of $1 billion in the past decade to in-source more manufacturing of their products. This leads to massive economic growth in those areas.
Con: Increased Costs
If you’re a company that uses aluminum to produce your products (i.e., cars and planes) you know that many foreign products, including aluminum, are cheaper. If a tax is imposed on those foreign products, they become more expensive than buying it locally.
So you have two options:
You can buy the foreign product and pay the tax, or you can pay for it locally at a higher cost than you’re used to paying. Either way, there’s an increased expense, and that expense has to either be absorbed by the company, reducing or eliminating its profit margins (not likely) or passed on to the consumer (likely).
The recent tariffs on China include a lot of construction equipment, such as bulldozers. While this may provide new jobs for American construction, it’ll also increase the cost of construction. That cost may be passed all the way down to the consumer when they want to build a new home for example.
The short answer–these taxes will likely increase the cost of products you use. Whether it’s a car you buy or a can of soda, costs will eventually go up because it’s more expensive to produce.
Con: Fewer Choices
If more foreign companies are getting hit with a tariff, it’ll become cost-prohibitive for them to import their products to the United States. So they’ll focus their efforts on other countries. This sounds great for the U.S. economy but it also reduces competition and offers consumers fewer choices on their products.
Let’s say Trump is successful in implementing a 25% tariff on all foreign cars. A car that once cost $20,000 to import now costs $25,000–reducing your margin as a reseller in the U.S. Unless you increase the cost of the car, which many customers won’t appreciate, you will be better off not selling that product and instead focusing more on cars that are produced locally.
This ultimately provides American consumers with fewer options than they once had–unless they want to pay a premium for a foreign car.
Con: Less Innovation
There are certain tax credits in place that encourage innovation for local companies. While the details are complex, the simple version is that if you put money into research and development, with the intention of creating new, innovative, and increasingly helpful products and services, you’ll be rewarded with tax credits.
While that’s over-simplified, the basis of it makes sense. Since foreign companies have been importing their products into the United States, U.S. companies in many industries have to find new and innovative ways to drive down costs and compete with foreign companies.
Tariffs and ensuing trade wars take that threat away from companies in the United States. This means that companies could still take advantage of innovation tax credits, but in theory, would not have to worry about being undercut by foreign competitors. Some feel this may reduce innovation and competition, and cost the economy billions. As a consumer, this may mean more monopolies with less innovative and less affordable products.
Another, more indirect way that you as the consumer will be impacted by tariffs and a trade war is in your investment portfolio.
If you are heavily focused on investing in index funds or companies that operate primarily in the tariff-impacted countries (China, Mexico, Canada, or countries in the EU), you may want to keep an eye on your portfolio. If things went Trump’s way, you’d see your domestic stocks increase, and your foreign stocks decrease in value.
While shifts like this would probably take years to happen, it’s smart to keep an eye out now.
It’s still too early to know how these tariffs will affect us. Some data suggest about 6,000 jobs could be lost in Canada and nearly 23,000 jobs may be eliminated in the United States, based solely on the Canadian-U.S. trade war. However, we have yet to see data on how many jobs could be created from manufacturing more American-made products.
So the question remains–does the good outweigh the bad? It’s for you to decide which side you fall on and what you support, but knowing how it may or may not impact you and your wallet is the important thing to remember.