President Trump recently announced that the United States will be implementing a 10% tariff on $300 billion in Chinese imports effective September 1.
Tariffs are used to restrict imports by increasing the price of goods and services purchased from another country, making them less attractive to domestic consumers.(Source: https://bit.ly/2C9sF1b)
Ostensibly, these tariffs are focused on consumer goods like electronics (smartphones, laptop PCs, video game consoles), apparel, and footwear. These items have peak imports during the last quarter of the year so it is speculated that there will be an influx of imports in attempt to beat the upcoming tariffs.
Just two weeks ago, Chinese media outlet Xinhua stated China will take “necessary countermeasures to defend its core national interests and it’s people’s fundamental interests if the United States goes ahead with these announced tariff hikes.” Of course, we know now that the countermeasure is the devaluation of the yuan which caused the Dow to drop when the stock market reopened the following Monday (August 5) and initiating a trade war. China has also since announced that they will suspend all agricultural product purchases from the United States.
So, what does this all mean? Well, it is assumed that China’s devaluation of the yuan has put us in a win-lose situation. Since China allowed its currency to weaken, China is now paying for at least part of the tariffs proposed by President Trump. However, because the tariffs are now being paid, it is unlikely U.S. businesses will see a boost in domestic sales. Essentially, it’s impossible to have both the tariffs and an increase in domestic sales.
“Some U.S. consumers may switch their purchases to U.S. goods, but they won’t be able to afford as many, and other consumers may simply put off purchases altogether…if the Chinese allow the yuan to keep falling, it could theoretically undo the effect of the tariffs. Consumers would see the same prices they did before the tariffs were imposed. U.S. manufacturers face a double-edged sword: China’s devaluation of its currency makes their inputs cheaper. But it also makes foreign demand for their products weaker.”
–Karl W. Smith, assistant professor of economics at the University of North Carolina’s school of government.(Source: https://bloom.bg/2yJhCI8)
It is important to keep in mind that though this trade war is between two world powerhouses, it will affect the entire world. The European economy has already been struggling and the devaluation of the yuan will make it harder for countries whose economy depends on import/export to compete. Caterpillar, an American company, sell their machinery internationally and heavily depend on China’s inexpensive steel and aluminum to build. They have since resorted to buying domestically because of the tariffs but don’t see it as a permanent solution since U.S. aluminum and steel are so costly. Not to mention, China pulling out of all agricultural purchases from the U.S. will most definitely have further adverse effects to the economy.
Supply chain is global, and the ripple effects of the tariffs will be as cyclic as a leaky faucet on a clogged sink with no clear indication of who will come out on top.
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