U.S. President Donald Trump went ahead with his plan to impose new tariffs on Chinese goods on Friday, a decision that will almost certainly spark a trade war between the world’s two largest economies. At a campaign rally on Thursday night in Great Falls, Montana, he had reaffirmed his intentions to impose $34 billion in duties against China which then came into effect just after midnight Eastern standard time. Prior to the event, he had also told reporters that he’s prepared to escalate the conflict if China follows through on its threat to retaliate.
Such a trade war is likely to take a heavy toll on the American economy. The tariffs that policymakers have been threatening to impose would not only have a negative impact on the trade component of growth, but it would also spill over to consumption and investment, which means that we can expect a decline in the standard of living for many Americans.
China’s plan to impose tariffs on agricultural and energy products from the U.S. in retaliation for the duties America just imposed is one of the more prominent measures to harm U.S. economic growth. American producers will have to pay higher costs to sell their goods to China, while at the same time they will also lose some of their existing revenue as Chinese buyers seek cheaper imports from other countries. China is already finding alternative sources of soybeans, which had been generating $14 billion in sales annually for American suppliers.
The U.S. exported $25.2 billion of agricultural products to China in 2016, and a large percentage of these exports are at risk of being replaced by alternatives. And if other options aren’t available, Chinese buyers will likely cut back on their purchases rather than pass the additional costs onto consumers. Beef, pork, chicken, fish, fruit and vegetables, dairy products, nuts and electric cars are all likely to be targeted with additional duties and become more expensive for Chinese shoppers.
U.S. had already slapped tariffs on steel and aluminum in March and threatens to do the same for high-tech goods as well. These measures will actually harm American businesses and consumers when they purchase intermediate or finished goods. The Donald Trump administration has plans to place tariffs on aircraft parts, boat motors, large vehicles, medical equipment, trains, electronic equipment, radar and radio equipment, LEDs, TV and video parts, batteries, machinery, lubricating oils, plastic pipes, chemicals, and more.
Many of these products are purchased by U.S. companies like General Electric and Best Buy, which have already lodged complaints with the government. A 25% tariff on high-tech goods will ultimately increase costs to Americans by $12.5 billion. In contrast to China’s agricultural imports, U.S. companies have fewer alternative suppliers that can produce the high-tech products they need in such large quantities. As rising costs squeeze margins for American producers, fewer funds will be available to invest in new business lines and expand growth.
China’s steel imports amounted to $29 billion in 2017, and aluminum imports accounted for another $19 billion in the same period, according to the U.S. Department of Commerce. According to my calculations based on total imports and stated tariff percentages, tariffs on steel and aluminum will cost Americans $9.15 billion.
A study by the Brookings Institute showed that about two million jobs might be at risk as a result of the new tariffs. It is unlikely that all of these positions will be lost, but assuming that one in four of these jobs were to result in layoffs that would leave us with 500,000 jobs eliminated. The tariffs on steel alone were projected to result in 146,000 job losses. The average income in the U.S. was $59,000 last year. Applying this figure to the 646,000 jobless people would yield a total loss of $38 billion. And that would be a direct result of the tariffs. Estimating the indirect losses and job cuts stemming from lost income at the same rate of 25%, the losses would then amount to $47.6 billion. Granted, these are back-of-the-envelope calculations based on some given assumptions. The numbers could be lower or higher. But it’s clear that much damage could be done by the tariffs and ongoing trade war.