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 across party lines. 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. Since early 2018, he has ratcheted up tariffs, which are a tax on imports, and encouraged U.S. companies hurt by them to move production — and 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. China has demanded that the U.S. lift all tariffs if a deal is to be done and signaled it’s digging in for a long haul.
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 several countries on national security grounds, arguing that a weakened U.S. industry would be less able to build weaponry in a crisis. Tariffs on goods specifically from China started in July 2018. China responded in kind. Before the year ended a truce was called and a deal seemed to be in the offing until May 2019, when Trump started raising tariffs again on a scale not seen in decades, provoking further retaliation. Trump and Chinese President Xi Jinping agreed in June to restart talks. Then Trump, claiming China had failed to keep a promise to buy more from American farmers, threatened a 10% tariff on all remaining imports from China, including consumer staples such as clothes, shoes and electronics. (Some took effect on Sept. 1, others were delayed until mid-December.) China announced countermeasures and Trump promised another escalation in October, then put it on hold. In November, both sides said tariffs could be rolled back in phases as part of an initial trade deal in the works.
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. A United Nations report released Nov. 5 concluded that U.S. consumers were bearing the brunt, but that Chinese companies were starting to absorb some of the costs as well.
6. Is Trump’s strategy working?
The U.S. trade deficit increased to a 10-year high of $621 billion in 2018, and the trend was continuing in 2019. 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, although some economists are warning of recession risk. U.S. gross domestic product grew in the third quarter at a 1.9% annualized rate, better than analysts had forecast but below Trump’s goal of 3% annual growth.
The UN report found that exports of Chinese goods hit by the tariffs dropped 25% in the first half of 2019, for a loss of $35 billion. That’s consistent with an earlier analysis by Bloomberg Economics that showed U.S. imports of Chinese goods hit by tariffs in 2018 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-end 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. In another warning sign for China, factory prices have been falling, reflecting a weakening domestic economy.
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?
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. That’s not what China wants to hear.
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