1. Why are we in a trade war?
U.S. President Donald Trump, who calls himself “Tariff Man,” says China and other trading partners have long taken advantage of the U.S., an argument that enjoys broad support among U.S. lawmakers. He points to the trade deficit (the difference between imports and exports) as evidence of a hollowing out of U.S. manufacturing and the loss of American might. For more than a year, he has ratcheted up tariffs, which are a tax on imports, and encouraged U.S. companies hurt by them to move production — and factory jobs — back home.
2. Who are Trump’s targets?
Mainly China, which accounts for the bulk of the deficit. But Trump also pulled the U.S. out of a proposed trade deal with Japan and 10 other Asia-Pacific countries, calling it unfair for U.S. workers, and started talking directly with Japan instead. He has threatened 25% tariffs on millions of imported cars and car parts from Europe and Japan, and insisted on renegotiating (and renaming) the 1994 pact with Canada and Mexico known as Nafta. A threat to impose tariffs even figured into Trump’s immigration dispute with Mexico.
3. What’s special about China?
China’s admission into the World Trade Organization in 2001, under rules that granted it concessions as a developing country, greatly accelerated its integration with global markets and supply chains. Studies have shown that Chinese exports led to lower prices for U.S. consumers — and helped lift millions of Chinese out of poverty. The country’s ascent also resulted in the loss of millions of U.S. factory jobs. China’s power — especially its technological prowess — is now at a point where it risks eroding American military and economic advantages. China insists it plays by global trade rules, and it sees the U.S. as seeking to contain its rise.
4. What’s happened with tariffs?
Trump started in January 2018 with levies on imported washing machines and solar panels to protect U.S. producers. He then hit steel and aluminum imports from a variety of countries on national security grounds, arguing that a weakened U.S. industry would be less able to build tanks and other weaponry in a military crisis. Tariffs on goods specifically from China kicked in starting in July 2018. China responded in kind. A truce was called in December, and a deal seemed to be in the offing until May, when Trump started raising tariffs again on a scale not seen in decades, provoking further retaliation. Trump and Chinese President Xi Jinping agreed to restart talks at the Group of 20 summit in Japan on June 29, averting another threatened round of tariff increases, at least temporarily.
A middleman — the U.S. importer of record — pays the tariff when the product lands in the country. The importer might absorb the cost or pass it along to a wholesaler, who might pass it to a retailer, who might raise the price for consumers. In those cases, Americans pay. Or the Chinese producer might cut factory prices to make up for the tariffs, or shift production outside China to avoid them. In such cases, the economic pain would be felt in China.
6. Is Trump’s strategy working?
The U.S. trade deficit increased to a 10-year high of $621 billion in 2018. Economists say the trade war actually helped to widen the gap by contributing to an economic slowdown in China and Europe. Meanwhile, American farmers have lost markets and income as China and other trading partners raised tariffs in retaliation. Trump is holding tight to his view that the trade war is helping the U.S. economy: gross domestic product in the first quarter grew at a solid 3.1%, in part because of a boost from net exports. But analysts surveyed by Bloomberg project that gains will cool to 1.8% in the second quarter, a two-year low, as Trump’s trade policies and slower global growth make companies more hesitant to hire and spend.
Analysis by Bloomberg Economics shows that for the thousands of categories of Chinese goods that saw tariffs imposed from July 2018, U.S. imports were down 26% year-on-year in the first quarter of 2019. In the same period, Taiwan and South Korea saw sales of electronics components accelerate and Vietnam saw the same with furniture -— a sign that tariffs have accelerated the shift of low valued-added manufacturing out of China. Giant Manufacturing Co. the world’s biggest bicycle maker started moving production of U.S.-bound orders out of its China facilities to its home base in Taiwan as soon as it heard Trump threaten tariff action in September.
8. Who else is vulnerable?
U.S. companies including Walmart Inc. and Nike Inc. have warned of higher prices. Apple Inc. faced hits in both directions, since its popular iPhone is assembled in China in part with components made in the U.S. Dell Technologies, HP, Intel and Microsoft have all opposed Trump’s proposed tariffs on laptop computers and tablets, arguing they would increase prices for consumers and hurt small businesses. The world economy could lose $1.2 trillion of output by 2021 if the trade war escalates, according to Bloomberg Economics. That estimate is based on 25% tariffs on all U.S.-China trade and a 10% drop in equity markets. Some economists have even predicted a global recession.
9. Is there an end in sight?
Larry Kudlow, the White House National Economic Council director, reiterated in Japan the U.S. assessment that the trade deal was 90% complete when talks broke down in May, but neither side has detailed what the sticking points are. Meanwhile, Trump’s unorthodox threat to use tariffs to pressure Mexico on border security — despite a newly minted free-trade deal — raised questions about the value of any agreement with the U.S. Trump also has said he wants to keep tariffs in place until he’s sure China is complying with any deal — which means they could be around for years.
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