How Does The Ongoing Trade War Affect You?
As trade tensions between the U.S. and the rest of the world escalate, expect to pay more.
A trade war is a side effect of protectionism that occurs when one country (Country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A's imports. A tariff is a tax imposed on imported goods and services. Trade wars can commence if one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers. Trade wars are also a result of a misunderstanding of the widespread benefits of free trade.
America’s last major trade war happened after imposition of the 1930 Smoot-Hawley Tariff, which increased 900 import tariffs from 40-48%. It was supposed to support U.S. farmers whose land had been devastated by the Dust Bowl, but it resulted in higher food prices for Americans who were already crippled by the Great Depression. America’s trade partners at the time hit back with their own tariffs, and global trade fell by 65%, worsened the depression, and contributed to the beginning of World War II.
How Does it Affect You?
The trade war is already increasing the prices of consumer goods that use steel and aluminum. Domestic manufacturers that rely on imported raw materials or parts are reacting to higher costs. Since their profitability is lower, their only other choice is to slash jobs. Soda and beer suppliers are the first to raise prices.
The tariffs 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 their businesses grow, they would add jobs.
But Alliance of Automobile Manufacturers warned 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.”
Many U.S. industries were affected soon after Trump announced the tariffs. Mid-Continent Nail in Missouri announced layoffs because steel prices are now too high for them to remain profitable. Harley-Davidson announced it would move some production abroad to avoid retaliatory EU tariffs. The Maine lobster industry will suffer from Chinese retaliatory tariffs on U.S. seafood. California cheese makers are already seeing their markets in China and Mexico disappear due to retaliatory tariffs. Wisconsin auto parts manufacturers and the U.S. bourbon industry are other industries being punished.
Many U.S. imports from China originated in the United States. Raw materials are sent to China for processing, then exported back into America. An example is a salmon caught in Alaska and sent to China for processing, then sent back to U.S. grocery shelves. If Trump imposes tariffs on seafood imports, it will raise prices by 25 cents to 50 cents a pound.
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 could get laid off.
Consultant Oxford Economics predicted the trade war could cost the global economy $800 billion in reduced trade. That could slow growth by 0.4 percent. It's occurring at the same time that oil prices and interest rates are rising.
Trade Wars can have an adverse effect on the global economy but the goal of it is ultimately to maintain fair trade between nations. Regardless of which nations engage in trade wars, their actions ultimately affect the everyday consumer with fluctuating prices for goods and services. The instability caused by trade wars has as much potential to damage an economy as it does to ultimately create a better economic situation for the nations involved.
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