Can Tariffs Bankrupt Americans?

Since our last article on the U.S. China trade war, China officially retaliated against America’s 25% tariff on $200 billion in goods with its own tariff on $60 billion of American goods. Over 5,000 goods will be taxed at a 25% rate. Other goods will be taxed at a rate of 20% which is an increase from 5% and 10%. On the possibility of taxing just about all Chinese imports at a 25% rate, President Trump stated, “We have the right to do [tariffs on] another $325 billion at 25% in additional tariffs. I have not made that decision yet.”

This is consistent with how Trump’s negotiation process has gone. When he takes action, he threatens more action but doesn’t deliver until first trying to negotiate. He has been talking about this tranche of tariffs for a while. It’s less clear what could happen after that tranche of goods is tariffed. One of the most hotly discussed topics on trade has been if China would stop purchasing U.S. treasuries or worse sell them. At a certain point when economic wars become extremely fierce, there is risk of a real war. While that’s unlikely, even the increased threat of a war would send stocks crashing and could push up inflation.

As we discussed in a previous article, bold promises on big legislative achievements and deals need to be taken with a grain of salt. A deal with China could last for decades or it could be broken before it’s agreed upon, like what just happened. Any timeline should be questioned. That being said, when asked about a timeline on these negotiations, Trump stated, “We’ll let you know in three or four weeks if it’s successful.” There seems to be market moving news every few days, if not every few hours. However, actual negotiation progress is difficult to come by.  

Impact Of Trade War On Households

As you can see from the chart below, the current 25% tariff rate on $200 billion worth of goods from China will cost GDP $62 billion, employment 200,000 jobs, and households $490.

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Gary Anderson 1 year ago Contributor's comment

If inflation results, the Fed may not be able to cut because it would weaken bond collateral. But tariff wars, as Scott Sumner has said, can be deflationary as in the Great Depression. Also Fed miscalculation risk rises if the tariff was continues to escalate.

Gary Anderson 1 year ago Contributor's comment

Intellectual property is not the biggest issue. Tech transfers are the biggest issue. Since tech transfers are not illegal in and of themselves there appears to be an impasse. If Trump bans US tech firms from doing business in China, other nations will take our place, but it may break the impasse.