Trump tariff, China trade war: consumer goods will be hit

President
Donald Trump’s new tariffs on Chinese goods will drive up costs
on many everyday products.
Win
McNamee/Getty; Shayanne Gal/Business Insider

• President Donald Trump’s newest round of tariffs on $200
  billion worth of Chinese goods adds a new element to the trade
  war.
• For the first time, consumer goods are going to be directly
  hit by the new 10% duty, likely causing an immediate increase in
  prices for US shoppers.
• The increase in inflation from the new trade war attack
  “will be meaningful,” economists say.

President Donald Trump’s
latest round of tariffs added a new dimension to the
trade war with China: US consumers are going to get hit
directly.

The
previous round of tariffs imposed by the president on

$50 billion worth of Chinese goods focused almost exclusively

on industrial goods and intermediate parts on final
goods that are then sold to consumers.

This led to
an indirect hit to consumers. As businesses
faced higher costs for input goods, the companies were forced
to either cut back in other areas — such as laying off workers —
or pass along the price increase to consumers.

While the effect on consumers has trickled down previously, the
latest round of tariffs on $200 billion worth of Chinese goods
constitutes a direct hit.

Many of the
5,745 items on the newest tariff list are consumer
goods or things that Americans buy every
day: fruit juice, furniture, air conditioners,
and more.

The consumer goods affected represents a dramatic increase
form the previous round of tariffs, according to a breakdown of a
previous version of the list of goods affected. (Many of those
items made it to the final list.)
Chad Bown, Euijin Jung, and Zhiyao Lu of the
Peterson Institute for International Economics say the reason for
the shift is simple: The were only so many goods left to
hit.

“Consumer goods made up only 1% of the products of the
first $50 billion of imports from China subject to his announced
tariffs. The rest affected intermediate inputs and capital
equipment,”
the economists wrote. “The explanation for this shift lies in
the fact that there are fewer and fewer such supply chain
elements left to target. Consumer products are much of the
imports from China that were left.”

The sellers could choose to eat those new duties and see
their margins decline. But based on price changes for goods hit
with tariffs in previous rounds, it is likely that at least some
of the cost increase will be handed to consumers.

Many members of the Trump administration have argued that
the increases will be minor and most Americans won’t
notice.

““Well, you can do the numbers this way if you have a 10%
tariff on another $200 billion, that’s $20 billion a year. That’s
a tiny, tiny, tiny fraction of 1% total inflation in the US,
because it’s spread over thousands and thousands of products,”

Commerce Secretary Wilbur Ross said Tuesday. “Nobody’s going
to actually notice it at the end of the day.”

But many economists disagree, since businesses that sell
the same goods but don’t source the product from China may see an
opportunity to grow their profits by matching the price increase.
Ultimately, this will lead to price increases for consumers and a
boost to inflation, economists say.

Ian Shepherdson, chief economist at Pantheon
Macroeconomics, argued in a note to clients on Tuesday that while
the real danger lies in the tariffs’ increase from 10% to 25% at
the start of 2019, the initial hit will be significant,
too.

“The inflation hit is harder to quantify, but it will be
meaningful,” Shepherdson wrote. “Most items of clothing and
furniture are exempt from the tariffs but many food items are
included. We don’t know for sure how quickly importers will raise
wholesale prices of the affected items, or how quickly
manufacturers of substitutes for Chinese products will lift their
prices.”

Based on Shepherdson’s rough math, the new tariffs could
add another 0.5 percentage points to the current consumer price
index — which, based on the latest CPI
release, would boost the inflation gauge to 3.2%
year-over-year. Such an increase would not go unnoticed by
policymakers or American families.

“That’s enough to matter, both to the Federal Reserve and
to the public, who will notice when prices in Walmart start to
jump,” Shepherdson said.