- President Donald Trump’s newest round of tariffs on $US200 billion worth of Chinese goods adds a new element to the trade war.
- For the first time, consumer goods are going to be directly hit by the new 10% duty, likely causing an immediate increase in prices for US shoppers.
- The increase in inflation from the new trade war attack “will be meaningful,” economists say.
The latest round of tariffs, a 10% duty on roughly $US200 billion worth of Chinese goods coming into the US, went into effect on Monday adding a new layer to Trump’s trade war with China.
The previous round of tariffs imposed by the president on $US50 billion worth of Chinese goods focused almost exclusively on industrial goods and intermediate parts on final goods that are then sold to consumers.
This led to an indirect hit to consumers. As businesses faced higher costs for input goods, the companies were forced to either cut back in other areas – such as laying off workers – or pass along the price increase to consumers.
While the effect on consumers has trickled down previously, the latest round of tariffs constitutes a direct hit.
Many of the 5,745 items on the newest tariff list are consumer goods or things that Americans buy every day: fruit juice, furniture, air conditioners, and more.
The consumer goods affected represents a dramatic increase form the previous round of tariffs, according to a breakdown of the list of goods affected. Chad Bown, Euijin Jung, and Zhiyao Lu of the Peterson Institute for International Economics found that 24% of the goods that will be hit with Monday’s tariffs are consumer goods. That’s an increase from the 1% of goods in the initial wave of tariffs that were consumer goods.
“But Trump’s latest phase 2 and his potential phase 3 tariffs increasingly target consumer goods,” Bown, Jung, and Lu wrote. “American households will soon be footing the bill for Trump’s trade policy in the form of higher prices.”
In a previous report on the tariffs, the researchers said the reason for the uptick in consumer goods on the latest list is simple: there were only so many goods left to hit.
“Consumer goods made up only 1% of the products of the first $US50 billion of imports from China subject to his announced tariffs. The rest affected intermediate inputs and capital equipment,” the economists wrote. “The explanation for this shift lies in the fact that there are fewer and fewer such supply chain elements left to target. Consumer products are much of the imports from China that were left.”
The sellers could choose to eat those new duties and see their margins decline. But based on price changes for goods hit with tariffs in previous rounds, it is likely that at least some of the cost increase will be handed to consumers.
Many members of the Trump administration have argued that the increases will be minor and most Americans won’t notice.
“”Well, you can do the numbers this way if you have a 10% tariff on another $US200 billion, that’s $US20 billion a year. That’s a tiny, tiny, tiny fraction of 1% total inflation in the US, because it’s spread over thousands and thousands of products,”Commerce Secretary Wilbur Ross said Tuesday. “Nobody’s going to actually notice it at the end of the day.”
But many economists disagree, since businesses that sell the same goods but don’t source the product from China may see an opportunity to grow their profits by matching the price increase. Ultimately, this will lead to price increases for consumers and a boost to inflation, economists say.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, argued in a note to clients on Tuesday that while the real danger lies in the tariffs’ increase from 10% to 25% at the start of 2019, the initial hit will be significant, too.
“The inflation hit is harder to quantify, but it will be meaningful,” Shepherdson wrote. “Most items of clothing and furniture are exempt from the tariffs but many food items are included. We don’t know for sure how quickly importers will raise wholesale prices of the affected items, or how quickly manufacturers of substitutes for Chinese products will lift their prices.”
Based on Shepherdson’s rough maths, the new tariffs could add another 0.5 percentage points to the current consumer price index – which, based on the latest CPI release, would boost the inflation gauge to 3.2% year-over-year. Such an increase would not go unnoticed by policymakers or American families.
“That’s enough to matter, both to the Federal Reserve and to the public, who will notice when prices in Walmart start to jump,” Shepherdson said.