Tariffs and Trade Wars: Who Pays the Price?Submitted by Bernhardt Wealth Management on May 28th, 2019
Tariffs and continued saber-rattling over US-China trade have been the major factor giving the stock market jitters the past couple of weeks. Earlier this month, President Trump upped the ante, responding to what he characterized as Chinese bad faith by announcing a 25% tariff on most goods imported from China. China, as previously, promised retaliation by increasing duties on American imports.
But who actually pays for trade tensions and tariffs when the world’s two biggest economies clash? President Trump, in a recent tweet, asserted, “Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars’ worth of goods & products. These massive payments go directly to the Treasury of the U.S.” This would indicate that the Trump tariffs are generating revenue for the public coffers of the U.S. However, let’s consider the effect of an additional 25% import duty on, say, the consumer electronic sector, an industry that imports huge amounts of product from China.
Someone must pay the increased cost of the product. There are only two choices for this: the importer or the consumer. If Apple’s cost of imported components for iPhones goes up by 25%, they may decide to absorb some or all of the costs themselves. Of course, this reduces the profit margins of a major U.S. corporation that employs thousands of people and has thousands of shareholders. On the other hand, they may increase the cost of the iPhone by 25%, preserving their profit margin while passing the added cost on to the consumer. That, too, has a ripple effect, as consumers pay more for iPhones and have less money to spend for other goods and services that are important to the US economy.
And what about U.S. companies and individuals in industries that are the object of China’s retaliatory trade actions? Talk to U.S. farmers, for example, who are seeing their previously large grains sales to China being redirected to countries with trade policies more favorable to the Chinese, such as Brazil and Argentina. These nations have been itching to claim a greater share of agricultural exports to China for years, and the current dispute with the U.S. is creating exactly the sort of climate they need.
Are Chinese companies and individuals feeling similar pain from U.S. tariffs? Not necessarily. The Chinese government provides subsidies to many industries and actually retains ownership of others. Thus, it heavily subsidizes some industries while insuring that others are insulated from the pricing effects of the trade disputes with the U.S.
Economists generally view tariffs as an impediment to global commerce and the health of the world economy. While some applaud President Trump for taking a tough stance with China on trade—and while most agree that the Chinese government has long engaged in predatory practices, both in trade and intellectual property—others bemoan the current effects of the U.S.-China tariffs on the paychecks of Americans and the profitability of American companies. Meanwhile, the stock market continues to gyrate based on the latest communications coming from either Beijing or the White House.
Let’s hope that the leaders of the world’s two largest economies can end their brawl. When giants fight, everybody’s furniture gets broken.