Trade Wars and Their Effect on the Economy and You

A trade war occurs when a nation imposes tariffs or quotas on imports, and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade.

A trade war starts when a nation attempts to protect its domestic industry and create jobs. In the short run, it may work. Tariffs are intended to give a competitive advantage to domestic producers. As a result, they would receive more orders from local customers. As their businesses grow, they would add jobs.

But in the long run, a trade war costs jobs. It depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.

Smoot-Hawley was designed to support U.S. farmers who had been ravaged by the Dust Bowl, but it also raised food prices for Americans who were already suffering from the Great Depression. Other countries retaliated with their own tariffs. The trade war reduced international trade by 65%. It turned a recession into a depression and contributed to the start of World War II.

Trump's Trade Wars

President Donald Trump initiated a trade war to reduce the U.S. trade deficit. It was the world’s largest since 1975. Reducing the deficit was part of Trump’s strategy to create more jobs.

In 2019, the deficit was $577 billion. The U.S. imported $3.1 trillion of goods and services while exporting $2.5 trillion.

Most of the deficit is due to U.S. consumption of imported consumer products. These include pharmaceuticals, televisions, clothing, and other household items. Another large contributor is imports of automobiles and parts. 

In early 2018, Trump said, "Trade wars are good and easy to win." He initiated three: a global tariff on steel, a tariff on European autos, and tariffs on Chinese imports. After Trump’s announcement, global stock markets tumbled in fear of a trade war among the world's three largest economies. In late 2018, several U.S. companies formed "Tariffs Hurt the Heartland.”

The Congressional Budget Office estimated the cost of trade barriers to the average American household in 2020 to be $580, including higher prices and lost economic growth.

Farm bankruptcy filings reached or exceeded record highs in nine states in 2019, an increase of 24% over the prior year. On May 23, 2019, Trump gave farmers $16 billion in aid to partially compensate for their losses. He gave them $12 billion in 2018.

Other countries formed trade agreements that exclude the United States. In April 2018, the EU upgraded its agreement with Mexico, removing almost all tariffs. In July 2018, the EU signed an agreement with Japan that reduces or ends tariffs on almost all goods. It established the world’s largest open trade zone, covering $152 billion in goods at the time.

Steel Tariffs

On March 8, 2018, the Trump administration announced a 25% tariff on steel and a 10% tariff on aluminum imports. It said that dependence on imported metals threatens America’s ability to produce steel and aluminum for national security. The Aerospace Industries Association said that Trump's tariffs would raise the military’s costs instead. 

The U.S. Congress is the only body authorized to impose tariffs, but in 1962, it allowed the president to curb imports that threatened national security. The World Trade Organization can't adjudicate trade disputes that involve security.

America is the world's largest steel importer, thanks to users like automakers. Steel importers employ 6.5 million workers, compared to around 140,000 workers in the U.S. steel industry. Tariffs lowered second-quarter profits for the big three automakers, which passed those costs on to consumers.

The European Union, Canada, India, Mexico, Norway, Switzerland, China, Turkey, and Russia filed complaints with the World Trade Organization.

On March 22, 2018, Trump exempted Canada, Mexico, South Korea, Argentina, Australia, Brazil, and the European Union from the steel and aluminum tariff. South Korea agreed to double its import quota for U.S. cars. It allowed the United States to keep its 25% tariff on pickup trucks until 2041.

After the June 9, 2018, G7 meeting, Canadian Prime Minister Justin Trudeau said Canada would retaliate with tariffs. Mexico announced tariffs that included steel, aluminum, pork, and other products. 

On May 17, 2019, Trump agreed to lift the tariffs on steel imports from Canada and Mexico.

Tariffs Against Mexico

On May 30, 2019, Trump threatened to impose a 5% tariff on all imports from Mexico. He promised to raise the tariff to 25% if needed to force Mexico to act.

The tariff violates the NAFTA. Trump said he would be able to override the trade agreement by declaring a national emergency. Republicans, who supported the president, were threatening to oppose this latest action.

U.S.-China Trade War Major Events Timeline

By far, the largest U.S. trade deficit by country is with China. In 2018, the U.S. trade deficit with China was $419 billion. The United States imported $540 billion, primarily in computers, cell phones, and apparel. Much of this is manufactured in China by U.S. companies but is still considered imports. The U.S. companies exported $120 billion to China. Most of this was commercial aircraft, machinery, optical and medical instruments, and vehicles.

In addition to reducing the trade deficit, Trump wanted to limit U.S. technology transfers to Chinese companies. China requires foreign companies who want to sell products in China to share their trade secrets. The administration also asked China to stop subsidizing the 10 industries prioritized in its "Made in China 2025" plan. These include robotics, aerospace, and software. China also plans to be the world's primary artificial intelligence center by 2030. China was unlikely to agree to Trump's demands.

The Trump administration imposed three tariffs on a total of $250 billion in Chinese imports. The Federal Reserve estimated these tariffs cost the average household $414 per year.

On May 10, 2019, Trump imposed a fourth tariff. He raised tariffs to 25% on $200 billion worth of goods. The Fed estimated that this tariff combined with the previous 2018 tariffs would cost the average household $831 a year. Trump increased the pressure on trade talks that were underway.

Trump threatened to expand that tariff to an additional $325 billion of Chinese imports. That would have raised prices on basically all Chinese imports. On June 29, 2019, Trump delayed the proposed tariffs to encourage renewed trade talks with China.

On June 1, 2019, China retaliated with a 25% tariff on $60 billion of U.S. goods. Some investors were also worried that China would sell some of its $1.1 trillion in U.S. debt. That would send interest rates higher and slow the U.S. economy.

On Aug. 13, 2019, Trump threatened a 10% tariff on Chinese electronics and clothing. The tariff started on Dec. 15 to limit damage during the holiday shopping season, but it began on Sept. 1 on other items.

Previous Tariffs

On Jan. 22, 2018, President Trump imposed tariffs and quotas on imported Chinese solar panels and washing machines. China is a world leader in solar equipment manufacturing.

On March 22, 2018, Trump confirmed that he had asked China to develop a plan to reduce the trade deficit by $100 billion. China's economic reform plan includes reducing its reliance on exports. But it said it can’t stop Americans from demanding low-cost Chinese goods.

On the same day, Trump announced tariffs on $60 billion of Chinese imports. He said China uses cybertheft, espionage, and government pressure to obtain leading-edge technology. On March 23, China announced tariffs on $3 billion of U.S. fruit, pork, recycled aluminum, and steel pipes.

On March 26, 2018, the administration began negotiations with China. It asked China to reduce tariffs on U.S. automobiles, import more U.S. semiconductors, and grant greater access to its financial sector.

On April 3, 2018, the administration threatened a 25% tariff on $50 billion in Chinese electronics, aerospace, and machinery. It lifted the sorghum tariffs on May 18.

On May 18, 2018, the USDA reported that unnamed foreign buyers, widely believed to be China, had canceled almost 950,000 tons of U.S. soybean orders. China imported $12 billion in U.S. soybeans to feed pigs, its primary meat staple. It replaced U.S. beans with those from Brazil. U.S. farmers sold half of their crop to China. As that market disappeared, it hurt the United States more than China. In July 2018, soybean prices hit a 10-year low as analysts predicted oversupply.

On April 5, 2018, Trump threatened tariffs on $100 billion more of Chinese imports, covering one-third of U.S. imports from China .

On April 10, 2018, China announced it would reduce tariffs on imported vehicles. But most automakers find it’s cheaper to build in China, regardless of tariffs.

On May 4, 2018, The New York Times reported that the administration asked China to reduce the trade deficit by $200 billion and cut tariffs on U.S. goods by 2020. It asked China to end subsidies to tech companies, stop stealing U.S. intellectual property, and become open to more U.S. investment.

On May 22, 2018, China agreed to cut tariffs on U.S. auto imports from 25% to 15%., going into effect onJuly 1.

On May 29, 2018, the administration said it would target $50 billion in imports from China. It would also restrict the Chinese acquisition of U.S. technology.

On July 6, 2018, U.S. tariffs went into effect for $34 billion of Chinese imports. China retaliated by raising tariffs on U.S. autos to 40%. Tesla announced it will build a factory in Shanghai to avoid the tariff. China also announced tariffs on U.S. agricultural exports.

Midwest farmers were stuck with excess produce and livestock. On July 24, 2018, Trump announced he would offer $12 billion in subsidies to American farmers. On Aug. 27, the administration announced a $4.7 billion bailout. Corn growers alone said that their costs top $6 billion.

On July 10, 2018, the administration announced 10% tariffs on another $200 billion of Chinese imports. They went into effect in mid-September 2018. The U.S. also threatened 25% tariffs after Jan. 1, 2019, on a variety of consumer goods, including fish, luggage, tires, handbags, furniture, apparel, and mattresses.

China threatened to retaliate by adding tariffs on $60 billion in U.S. exports. In response, Trump threatened to add tariffs until all $500 billion of Chinese imports are affected. That could have reduced economic growth by 0.75 points in 2018. It might have also threatened U.S. shale oil exports. China buys 20% of U.S. oil exports.

On Aug. 7, 2018, the administration announced a 25% tariff on $16 billion worth of Chinese goods. It went into effect on Aug. 23. It applied to industrial equipment like tractors, plastic tubes, and chemicals. In response, China announced a 25% tariff on $16 billion worth of U.S. goods, including autos and coal. It went into effect the same day.

On Sept. 18, 2018, the administration announced tariffs on $200 billion of Chinese imports. A 10% tariff launched on Sept. 24, 2018, and Trump announced a potential increase to 25% on Jan. 1, 2019, imposing tariffs on 5,745 items, and encompassing a wide range of electronics, food, tools, and housewares.

On Dec. 1, 2018, President Trump met with China's President Xi Jinping at the G20 Conference. Trump agreed to delay the 25% tariff increase from Jan. 1, 2019, to March 1, 2019. Negotiators planned to cover 142 issues. These included the protection of intellectual property, technology, and cybersecurity, as well as currency, agriculture, and energy.

In accord with the Dec. 1 agreement, China committed to reinstating “very substantial” purchases of soybean and other imports, though it did not specify quantities. On Dec. 12, the Senate Judiciary Committee heard extensive testimony about Chinese technology theft. On Dec. 13, the USDA reported that China purchased 1.1 million metric tons of soybeans. On Dec. 20, the Department of Justice unsealed indictments against two Chinese hackers for stealing U.S. trade secrets and technologies.

On Feb. 27, 2019, the administration dropped the threat of imposing the 25% tariff. It was originally scheduled to begin Jan. 1, and then moved to March 1, and then dropped.

Causes of U.S. Trade War With China

U.S. politicians have long threatened a trade war with America's largest trading partner in goods. A trade deficit occurs when exports are less than imports.

In 2017, the United States exported $130 billion to China. The three largest export categories are aircraft at $16 billion; soybeans at $12 billion; and automobiles at $10 billion. U.S. imports from China were $505 billion. Most of it is electronics, clothing, and machinery.

Half of all Chinese imports are goods used by U.S. manufacturers to make other products. They send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. The tariffs raise companies' costs, forcing them to either raise prices or lay off workers.

One example is salmon caught in Alaska and sent to China for processing, and then sent back to U.S. grocery shelves.

China is the world's top exporter. Its comparative advantage is that it can produce consumer goods for lower costs than other countries can. China has a lower standard of living, which allows its companies to pay lower wages. American companies can't compete with China's low costs, so the U.S. loses manufacturing jobs. Americans, of course, want these goods for the lowest prices. Most are not willing to pay more for "Made in America."

U.S. Trade War With the EU

On March 7, 2018, the EU threatened to carry out measures against the U.S. to correspond with economic losses suffered due to tariffs. Trump delayed the steel tariff until May 1, 2018.

On April 21, 2018, the EU upgraded its trade agreement with Mexico. It removes tariffs from almost all trade between the two areas.

On April 30, 2018, Trump announced he would delay the steel tariff against the EU until June 1, 2018. He wanted the U.S. ally to cut its 10% tariff on U.S. autos. He also asked the EU to set quotas on its steel exports. 

But on May 31, 2018, Trump revoked the delay. He imposed the tariff on Canada, Mexico, and the EU. The U.S. Aluminum Association said the move will disrupt "supply chains that more than 97% of U.S. aluminum industry jobs rely upon.”

On June 21, Germany proposed to end the EU's 10% tax on U.S. auto imports if Trump forgot about imposing a 25% tax on European auto imports. There is already a 25% U.S. tariff on light trucks.

On June 22, the EU retaliated to the steel tariffs with tariffs on $3.2 billion of American products. It targeted imports that will impact Trump’s political base. Examples of these taxable imports are bourbon, motorcycles, and orange juice.

On July 17, 2018, the EU signed a trade agreement with Japan, reducing or ending tariffs on almost all goods. It established the world’s largest open trade zone, and covered about $152 billion in goods. It went into effect on Feb. 1, 2019.

On July 25, 2018, the EU and the United States agreed to hold off on any new tariffs, reassess the steel and aluminum tariffs, and work toward zero tariffs on non-auto industrial goods. The EU agreed to import more U.S. liquefied natural gas and soybeans. That would reduce its reliance on Russian LNG and help out American farmers who have lost the Chinese market due to the trade war.

On April 9, 2019, Trump announced that he would impose tariffs on $11 billion in European imports. He wanted to force the EU to end subsidies for aircraft manufacturer Airbus. The tariffs could raise prices on imported cheese, bicycles, and kitchen knives.

How It Affects You

The trade war has raised the prices of consumer goods that use steel and aluminum. Costs have increased on imported clothes hangers, heavy-equipment materials, and computer chip and tool makers.

The Alliance of Automobile Manufacturers warned that U.S.-produced steel will cost more once cheap foreign imports are eliminated. The tariffs “raise vehicle prices for all customers, limit consumer choice, and invite retaliatory action by our trading partners.”

Foreign tariffs on U.S. exports make them more expensive. U.S. exporters may have to cut costs and lay off workers to remain competitively priced. If they fail, they may cut costs further or even go out of business. 

In the long term, trade wars slow economic growth. They create more layoffs, not fewer, as foreign countries retaliate. The 12 million U.S. workers who owe their jobs to exports could get laid off.

Oxford Economics predicted that the trade war could cost the global economy $800 billion in reduced trade and potentially slow growth by 0.4%.

Over time, trade wars weaken the protected domestic industry. Without foreign competition, companies within the industry don't need to innovate. Eventually, the local product would decline in quality, compared to foreign-made goods.