How the trade war with China could affect consumers

The Trump administration early Friday more than doubled a U.S. tariff on $200 billion in Chinese imports, from 10% to 25%, sharply escalating a trade war between the two countries. The president also threatened to slap a 25% tariff on almost all the remaining $325 billion in goods shipped in from China.

Negotiators for the United States and China ended a session of trade talks in Washington on Friday without an announcement of an agreement, hours after the new tariff hike took effect.

USA TODAY economics reporter Paul Davidson takes a look at how the tariffs will affect U.S. shoppers and the economy.

Why did President Trump impose the higher tariff?

White House officials say U.S. and Chinese negotiators were close to an agreement to resolve their trade fight but then China backed out, refusing to codify the deal in Chinese law.

What does the Trump administration want?

Administration officials want China to stop stealing U.S. intellectual property and forcing companies to hand the IP over to do business in China. They also want the Chinese government to stop subsidizing the country’s manufacturers, giving them what the U.S. considers an unfair advantage. And they want China to open its markets more U.S. products and services. Tariffs theoretically prompt U.S. businesses to shift from Chinese to American and other suppliers, hurting China’s economy and prodding its government to make concessions.

When did the higher tariff take effect?

The duty went into effect at 12:01 a.m. ET Friday and affects U.S.-bound goods that leave China after that time, not shipments in transit.

What products are hit with the higher tariff?

It affects more than 5,000 goods, including industrial chemicals, electronic circuit boards and a range of consumer products. Affected products include a variety of furniture, clothing, electronics, handbags, luggage, hardware, bicycles and bicycle helmets, shampoo, perfume, dishes, bed sheets, meat and cereal.

Will U.S. shoppers see higher prices on store shelves?

Almost certainly. American retailers and manufacturers were largely able to absorb the 10% tariff — narrowing their profit margins — negotiate offsetting price cuts with Chinese suppliers, import a big stockpile of goods before the tariff took effect, and spread the added cost across many products. But a 25% duty is too much to camouflage with such tactics and a big chunk of it is expected to be passed to U.S. shoppers.

When are shoppers likely to see the higher prices?

It could take weeks to months, says Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation. Many large retailers ordered extra inventory before the tariff hike, deferring any retail price increases for a few months. Smaller retailers are more vulnerable and some already have been hit with price increases from their vendors, Gold says. If the talks between the two countries continue, many retailers will likely hold off on price increases in the hope a deal is imminent.

But, “If the trade talks seem to fall apart and it looks like the tariffs are here to stay, that’s when we will really start to see higher prices,” Gold says.

The effect on retail prices will be more subdued if the tariff is on a component rather than a finished product and it might take six to eight months before shoppers see it, says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.

How will the tariffs affect the economy and jobs?

The new 25% tariff, combined with earlier duties imposed on $50 billion in Chinese shipments and on steel and aluminum, would cut U.S. employment by 934,000 and cost the average family of four $767 a year, according to a study by the Trade Partnership. So far, the existing 10% tariff and the other duties have caused barely a ripple for the U.S. economy, trimming growth by an estimated tenth of a percentage point in 2019 if they stayed in place, according to Oxford Economics. But the boost in the tariffs to 25% would triple the impact to three-tenths of a percentage point if sustained, crimping an economy that was forecast to go about 2.2% this year.

If Trump slapped a 25% tariff on the remaining $325 billion in goods the U.S. imports from China, it would cost the U.S. 2.1 million jobs and the average family of four more than $2,000 a year, according to the Trade Partnership analysis.

Is the U.S. winning the trade war?

Trump is pointing to a narrowing trade deficit with China as evidence the U.S. is winning. Fewer imports from China relative to exports to that country does boost U.S. gross domestic product, at least marginally. And some American manufacturers are expected to benefit as businesses switch to them from Chinese suppliers, such as makers of steel, textiles, apparel and electronics.

But that’s a myopic view, Hufbauer says. Many products no longer imported from China will likely be sourced from other countries, such as Vietnam, increasing the U.S. trade deficit with those nations. And higher retail prices and inflation will squeeze the pocketbooks of U.S. shoppers, likely translating into less spending and economic growth overall.

China also has slapped tariffs on U.S. exports to China and has threatened to expand them in response to Trump’s latest salvo, hurting U.S. farmers that produce soybeans, corn, beef, poultry, as well as makers of aircraft and boats, among other products. And the uncertainty caused by the trade war already has triggered a big selloff in U.S. stocks and crimped hiring and investment more broadly, Hufbauer says.

Ok, but can tariffs really work in the long run?

Yes, if the trade war doesn’t escalate further with tariffs on the remaining $325 billion in Chinese shipments. Ultimately, Hufbauer thinks China will open its markets somewhat and lower some tariffs, especially for U.S. agricultural products. And Chinese provinces could make their subsidies to businesses more transparent, allowing the U.S. to slap offsetting duties on Chinese products that benefit from the subsidies, Hufbauer says. That should discourage such government aid.

But it will be far more challenging to persuade China to open its markets to high-end U.S. technology products and ensure it doesn’t steal or force the transfer of related intellectual property, Hufbauer says. As a result, the trade-off will be worth the damage only if the standoff doesn’t intensify further.

“We still expect the U.S. and China to reach a limited trade deal, but it won’t be because of the tariff increase,” says Cailin Burch, global economist at the Economist Intelligence Unit a research and consulting firm. “It will be because both countries want a deal they can spin as a political win, and which will ease pressure on their economies.”

Read more at usatoday.com.