Escalating trade tensions between the U.S. and China could prove expensive for consumers.
Last week, the United States increased tariffs on $200 billion worth of Chinese goods after the two countries failed to come to a trade agreement.
The Trump administration originally implemented a 10% tariff on certain Chinese imports last summer, after alleging that China was engaging in unfair trade practices. Those tariffs are now at a 25% rate, after President Trump claimed that China had walked back parts of a developing pact.
Now, China has announced retaliatory measures, with plans to raise tariffs on $60 billion of U.S. goods starting at the beginning of June.
The most common result of governments increasing tariffs or engaging in trade wars is that prices for goods increase. So, for American consumers, it means that a number of common household goods and products, from seafood to T-shirts, will likely go up in price. One study earlier this year from research firm Trade Partnership Worldwide estimated that depending on how this trade scenario with China plays out, a family of four could pay an extra $767 to $2,389 each year.
To understand why, here’s what you need to know about tariffs, trade wars, and their potential effects on you as a consumer and an investor:
Tariffs are import taxes
Although there have been conflicting reports from government officials about how or if higher tariffs will affect the economy, the reality is that most, if not all of the added tax will be paid by American consumers, not China.
Why? Tariffs are taxes on imported products. Companies importing the goods tend to pass on that tax in the form of higher prices. So consumers end up paying more.
For example, products that China is exporting to the U.S. come into the country for consumers to buy at a price the market determines. Consumers had been paying the market price plus the 10% tariff on affected goods since last summer. Now, they could pay that market price plus 25%.
Why would the U.S. government want to make things more expensive? Their logic is that higher prices for Chinese goods will encourage Americans to buy domestic goods, which may be more attractively priced in comparison.
Tariffs can lead to trade wars
When a country levies a tariff on goods from another country, it’s common for the importing nation to retaliate. That can lead to what’s known as a trade war.
“A trade war is when one country imposes or raises significantly its import taxes or import duties on another country’s goods,” says Richard Ebeling, an economics professor at The Citadel in Charleston, South Carolina. “Then that other country retaliates with corresponding new or higher import tariffs on the initiating government.”
That’s what China did when the Trump administration originally implemented tariffs, and it’s what China is promising to do now following the U.S. hike. Beijing plans to raise tariffs on $60 billion of U.S. goods, to top rates of 20% to 25%. Previously, those goods had rates of 5% to 10%.
“The danger of this,” Ebeling says, is that “it can spiral out of control.”
In the Trade Partnership Worldwide study, that’s in part why the wallet impact estimate for consumers ranges from an extra $767 to $2,389 each year. The more retaliation comes into play, the higher prices go.
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Your investments may feel the impact, too
As consumers pay more for goods, the economy at large feels the effects, too. It’s possible that your investments, including those in your retirement accounts, may also get squeezed in the resulting bumpiness in the stock markets.
“It creates more volatility,” says Doug Boneparth, a certified financial planner and owner of New York-based financial firm Bone Fide Wealth. “My clients and investors who have a plan in place and are focused on their financial goals in the long term aren’t going to view short-term volatility as something that they need to concern themselves with.”
For businesses, the impact of tariffs can be more immediate. “[It] disrupts the entire global chain of suppliers, producers, and raw material manufacturers,” Ebeling says, which in turn affects revenues, profits—and ultimately, stock prices.
Trade wars can spook the markets, too. The Friday morning after the Trump administration’s tariffs on China increased to 25%, for example, the S&P 500, Dow Jones Industrial Average, and Nasdaq all fell at the start of trading before reversing course in the afternoon.
The takeaway: Prepare to pay more
It’s unclear if or when a trade deal between the U.S. and China will finally be hammered out, or if the Trump administration will continue to increase tariffs and trade barriers. China has retaliated in kind (and may take further action), which may hurt workers and businesses in certain industries, such as the agricultural sector.
But for U.S. consumers, the best thing you can do is to keep your financial goals in mind, keep saving and investing, and stick to your budget. You’ll probably notice prices going up, but for now, there’s little you can do about it.
“At the end of the day, the tariffs are eaten by...the American consuming public,” says Ebeling.
May 13, 2019