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Trade showdown

Your trade war questions, answered

Nancy Marshall-Genzer, Jed Kim, Renata Sago, Marielle Segarra, Danielle Chiriguayo, Jana Kasperkevic, and Aaron Schrank Apr 4, 2018
US President Donald Trump signs Section 232 Proclamations on Steel and Aluminum Imports in the Oval Office of the White House on March 8, 2018, in Washington, DC. MANDEL NGAN/AFP/Getty Images
Trade showdown

Your trade war questions, answered

Nancy Marshall-Genzer, Jed Kim, Renata Sago, Marielle Segarra, Danielle Chiriguayo, Jana Kasperkevic, and Aaron Schrank Apr 4, 2018
US President Donald Trump signs Section 232 Proclamations on Steel and Aluminum Imports in the Oval Office of the White House on March 8, 2018, in Washington, DC. MANDEL NGAN/AFP/Getty Images

The Chinese government today threatened to slap tariffs on 106 American products, including the nation’s largest exports: pork, soybeans, beef, fruit and nuts. Wine and recycled aluminum are on the list of potentially taxed exports as well. This new round of threats has got us asking a lot of questions, including: What happens if this whole thing goes economically south? If we have questions, we thought you might, too. So Marketplace host Kai Ryssdal went on Twitter and asked you. Check out some of the questions and our answers below:

How tariffs work

Tariffs typically get paid by licensed importers. And they get collected by the Bureau of Customs and Border Protection. That money goes to the U.S. Treasury and becomes part of the general budget. A long time ago, tariffs were a pretty significant source of income for the government, but these days, they are a very minor contributor, according to Gary Hufbauer, a former trade negotiator and a fellow at the Peterson Institute for International Economics.

The short answer is no, Hufbauer said. There is a hike, but it won’t be that much. What it actually ends up being depends on what the product is. Most goods that are included on the list are industrial inputs, components like wires or capacitors, whatever those are. Each is only a small part of a finished product, so increases on those will only contribute to minor price hikes. And those parts could potentially come from countries other than China. There’s more of an impact when the item is itself a finished product, especially if it’s something that China is the dominant supplier of. What we consumers will end up paying depends on how retailers decide to treat their markups. There aren’t a whole lot of those finished regular consumer items on the list.

There are some common consumer products that could go up in price if the tariffs become a reality. These include consumer electronics such as dishwashers and flat screen TVs, which would go up in price because the U.S. has proposed tariffs on imports of these products from China. And indirectly, clothing prices may go up because the U.S. has proposed tariffs on knitting, sewing and textile machines from China. American manufacturers use those machines to make clothing, so an increase in cost for production could be passed on to the consumer, or it could mean that more U.S. retailers may move their manufacturing abroad.

If the tariffs go into place, the average Chinese consumer probably won’t notice much of a difference. The $50 billion in U.S. products the tariffs would target accounted for 2.7 percent of China’s total imports in 2017, according to the Center for Strategic and International Studies. “China can source almost all of these products from other countries,” said CSIS’ Scott Miller. Brazil can send more soybeans, perhaps at a higher cost. China can buy more German Airbus A320s instead of Boeing 737s. 

But the tariffs going the other way could also impact Chinese consumption, because China may first look to make up for a loss of U.S. demand by increasing domestic consumption. That’s something Beijing has been pushing, said Abe Denmark, director of the Wilson Center’s Asia Program. “On the other hand, per-capita income remains low for significant swaths of China,” Denmark said. “Domestic consumption is not going to replace the United States as a destination for Chinese manufactured goods.”

The effect on agriculture and manufacturing

The National Pork Producers Council wrote that possible tariffs “could have a significant negative impact on rural America.” Farmers exported nearly $6.5 million worth of pork products last year. Top producers of pork include Iowa, Illinois, Minnesota and Indiana, according to the U.S. Census. Those same states play a key role in soybean production, another large U.S. export. When it comes to the wine industry, tariffs could hurt California, the nation’s largest wine-producing state. But New York, Pennsylvania and Oregon could also get hit. Taxes on fruit (grapes, oranges, apples, strawberries and lemons) and nuts would hurt the agricultural industries in Florida, California, Washington, Oregon and New York. In 2016, the U.S. Department of Agriculture highlighted trade as essential to the U.S. agricultural sector in particular, noting that exports account “for more than 20 percent of the volume of U.S. agricultural production.”

“This one is simply a math problem,” said CSIS’ Scott Miller. We can look at the next biggest export markets for goods on either side of this tariff equation and bet that both countries will look to send more of these targeted products to those countries. So, more Chinese TV sets will go to Japan, Canada, Mexico and Australia, according to CSIS. Printers? China’s next biggest markets are Iran, Russia and Canada.

Meanwhile, China has proposed 25 percent tariffs on some American goods, including soybeans. We also sell those to Mexico, the Netherlands, Japan and Taiwan. But China is far and away the U.S.’s largest market. “It’s difficult to see demand from other parts of the world even coming close to what we have in China,” said Abe Denmark, director of the Wilson Center’s Asia Program. “That’s a downside of a globalized economy.”

China has a way it could circumvent the tariffs and still get products to the U.S., said Julius Sen, an international trade expert at the London School of Economics: “What China can do is reroute the same product through a third country. So they would just say, this is not Chinese steel, this is British steel.”

Tariffs on different raw materials might play out differently in the U.S. and China, depending on where the majority of suppliers are based. It’s probably too early to tell how something like this will affect suppliers all over the world, but downstream suppliers might do some rearranging in their supply chain to find the cheapest materials or even shift some of their production overseas. Let’s look at how this might play out in the U.S.

Think of the production process like a river. At the beginning you are starting with a bunch of raw materials, and the further downstream you get, the closer you are to having a finished product. So upstream suppliers are usually those who deal with raw material while those downstream deal with specific parts and products that have been already made from those materials.

The two are affected in very different ways when it comes to tariffs. Just think about the recent raw steel tariffs. When the Trump administration announced the 25 percent tariffs on imported steel, it basically gave a green light to U.S. steel producers to raise their prices. Lisa Goldenberg, CEO of Delaware Steel Co. based in Pennsylvania, told us that such tariffs are “very, very good for Big Steel” but bad for manufacturers who buy the steel.

You don’t have to look far to find one of those downstream suppliers who might have to pay more for steel. American Keg Co., which is also based in Pennsylvania, is the last company in the U.S. making beer kegs out of American steel. Thanks to the new tariffs on steel, those kegs just got more expensive to make.

“Today you can probably buy an import keg at around $95 and a USA-made keg is going to be around $115,” Paul Czachor, CEO of American Keg Co., told Marketplace last month. And since the tariffs are just on raw steel and not on finished products like kegs, Czachor’s competitors are not feeling the same heat as he is. “It’s a difficult situation right now. We have a lot of patriotic customers that want to buy USA-made kegs with U.S. labor and U.S. steel but they’re only going to go so far as that price difference continues to rise.”

What Congress can (or can’t) do

The president has lots of constitutional authority to levy tariffs. Initially, the Constitution gave Congress the right to regulate trade between the U.S. and other nations. But over the past century, Congress passed a series of laws that gradually transferred trade powers to the president. Why? Because Congress, historically, was the protectionist wing of government. It started a trade war in the 1930s after imposing a series of tariffs. Over the years, the president was the adult in the room and was more restrained in trade disputes.

The transfer of trade power started in 1917, when the U.S. was entering World War I. The Trading with the Enemy Act of 1917 says the president can regulate all forms of international commerce and freeze or seize foreign assets during war time.

Congress followed up with the Trade Expansion Act of 1962 and the Trade Act of 1974.  They give the president the authority to impose tariffs or quotas if national security is threatened, or in retaliation for unfair trade practices.

Since it gave away its trade authority, Congress would have to work hard to stop President Donald Trump, according to Hufbauer. It could pass a measure with a veto-proof majority to either take away the president’s authority to impose tariffs and quotas or overturn one of the president’s actions on trade. That would require Democrats and Republicans to work together though, and you know how that goes. But members of Congress could also try to stop the president indirectly. They could put riders on must-pass appropriations bills that the president has to sign to prevent the government from shutting down. Those riders would prevent the president from taking certain trade actions. The Senate could also hold up confirmation of presidential nominees in an effort to get him to back down on trade.

Do trade wars even work?

“The long and short of it is, trade wars start for various reasons, but the bottom line is that there are no winners,” according to Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. When economists examined the global economic effects in the aftermath of trade wars, they found that “jobs were lost, growth was hit, and really, you can’t find any evidence that anybody ends up winning in any sense of the word,” she told us. As for why we keep doing them? That could be attributed to what getslost in translation between politicians and economists. Using the example of steel tariffs levied during George W. Bush’s administration, de Bolle notes that “the losses for the economy were a lot bigger than whatever the politicians thought they would gain from instituting those tariffs in the first place.”

This story was updated to include more questions and answers.

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