YOU JOIN US THIS MORNING WITH AN UPDATE ON THE ONGOING TRADE WARS. WHAT IS THE LATEST?
Last month, President Trump imposed a 10% tariff on an additional $200 billion of imports from China. Those tariffs went into effect on last Monday, and will rise to 25% in January. With this move, the Trump administration will have levied tariffs on nearly $253 billion worth of Chinese exports, roughly half of the $506 billion in goods China shipped to the United States last year. What is interesting about this round of tariffs is that it affects a broad range of consumer goods, and many American households will begin to feel the effects of the trade war when they go shopping.
REMIND US WHAT A TARIFF IS, AND HOW THEY WORK?
A tariff is simply a tax on goods imported into the United States. Just like sales tax, tariffs are set as a percentage of the value of the goods. So, when companies or individuals buy goods from foreign countries that have tariffs on them, they have to pay that amount on top of the value of the goods when they enter the United States. There are three primary reasons countries impose tariffs: to raise income, to give domestically produced products an advantage, and to penalize a particular nation by making its products more expensive. This latest round of tariffs is aimed at punishing China for what the President sees as unfair trade practices.
WHAT DOES THIS MEAN FOR EVERYDAY AMERICANS?
In short, these latest actions are going to mean higher prices for American consumers. The range of goods targeted is broad, including everything from canned fruit and pet products to shampoo and furniture. Shoppers may not see a full 10% increase in the costs of imported items – retailers are likely to try to absorb some of the cost increase – but prices on affected goods will go up, and they could go up more in January. Since this comes at a time when wage growth has been sluggish and inflation is on the rise, it is certainly not good for our pocketbooks, Tom. Finally, because this comes towards the end of the year, this could also make holiday shopping more expensive for consumers.
IS IT JUST CONSUMERS WHO WILL FEEL THE BITE?
It is not just consumers who are going to be affected. The Chinese government is not sitting on their hands. In response to this latest round of tariffs on Chinese goods exported to the US, Beijing announced plans to impose duties on another $60 billion worth of U.S. goods. This will mean economic pain for any American company that exports affected products to China. American farmers have already started to feel the pain, and some companies may have to lay people off if they lose significant business.
HOW DOES THIS COME TO AN END?
That is a great question. At the moment, there does not seem to be a short -term solution in sight. President Trump’s stated goal is to reduce the trade deficit with China, but a trade war is unlikely to do that. Ultimately, the pain inflicted on American consumers and businesses may put enough political pressure on the president to roll back some of these measures. We will simply have to wait and see.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
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