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According to the WTO, $34.8 trillion worth of merchandise was traded globally in 2017. Economists with the WTO projected the volume of merchandise trade would grow 4.4 percent this year. But the analysis didn’t factor in the over $330 billion worth of tariffs recently imposed or threatened by the world’s largest trading countries against one another.
The headlines can be immensely confusing because the tariff amounts being announced by governments only take into account the amount of the tariff, not the full value of what’s being traded. As Fortune reports, adding $200 billion in goods to the list of existing tariffs would bring the total value of “tariffed goods” from China to $450 billion. New tariffs are also added to whatever tariff existed before, further escalating costs – and uncertainty about future sales.
Poker Faces – Who’s Bluffing?
This is not easy to keep track of; the scale and scope of tariff increases is unprecedented in modern times and the lists of products targeted are changing quickly as governments recalibrate for economic and political reasons. Our illustrative chart below is just that – not something a business should rely on to understand the impact of current trade policy on their future sales. For that, public policy professionals inside companies are working nonstop with their procurement and supply chain specialists to estimate and forecast.
But in this political trade war, reality is hard to discern from posturing. Some of the tariffs imposed were done so for reasons of “national security,” a justification questioned by U.S. trading partners who then sought to “rebalance” the trade equation with tariffs on a similar list of U.S. exports. But many other types of products are being used as bargaining chips. Mexico has raised its tariff on chilled and frozen pork from zero to 20 percent in response to U.S. tariffs on steel and aluminum. Last year, U.S. pork producers fulfilled 80 percent of Mexico’s pork demand, but the tariffs could edge U.S. products out of the market in favor of cheaper imports, potentially costing the U.S. pork industry $600-835 million in lost sales over the next twelve months, according to the U.S. Meat Export Federation. More tariffs on more products are coming if the administration uses national security reasons to impose new tariffs on autos and auto parts.
Retaliation for steel and aluminum tariffs are only part of the equation. The biggest chunk of tariffs in the Great Tariff War of 2018 is between the United States and China, beginning with two rounds of tit-for-tat tariffs worth around $50 billion against one another. The United States just raised on the ante by another $200 billion. China will not fold; they will go “all in” in this poker game, but we don’t know what that means yet as they hold their cards close.
Play the Hand You’re Dealt
Some countries retaliated reluctantly (Japan is waiting for a WTO decision before imposing the tariffs it announced); others joined in right away (India, Russia, Turkey). Some are friends, hoping a taste of our own medicine will take away the tariff fever. Some don’t see any other way to respond. After all, the president said he respected any country that puts its own economic interests first, and perhaps there would be public pressure to not take the tariffs lying down. They do not see the United States as playing this game under the rules of the WTO (even poker games set the rules before starting – aces high), so they will test their case before an already beleaguered WTO dispute settlement system.
Calculating the Odds
If there’s one thing businesses hate, it’s uncertainty. Give them known risks and they will calculate the odds. Given them obstacles and many will find the workaround. But give them a moving target and it becomes enormously difficult to plan. Small businesses and farmers are even less well positioned to manage through the new costs that are coming.
Business associations representing all aspects of economic production in this country have been raising concerns, from American railways to retailers to tech companies, automakers, and agricultural producers. Some of the tariffs, such as on U.S. imports of steel and aluminum products, are in effect, and increased costs are beginning to ripple throughout industries that use these inputs. Most of the U.S. tariffs against China have been put out for public comment; there will be hearings in August. Some of the retaliatory tariffs against the United States are now in effect, others will be phased in; some exceptions apply – you’ll need to look through the specific tariff codes to find out whether the products you buy and sell are affected.
How Big Will the Pot Get?
For now, the tariffs are a major concern primarily for our producers who are forward planning. While we read near daily news about the trade war, it has yet to become a pocketbook issue. Even $200 billion in tariffs can be absorbed or spread so thin that the average person doesn’t feel the pain. A recent New York Times article provided estimates by economists Borusyak and Jaravel who calculate that the tariffs announced to date on imports from China would cost American households an average of $127 in annual expenditures. It’s a rough estimate depending on what you buy and the extent to which producers pass on the cost. And it may seem quite small as a consumer, but if you work for a company or industry hard hit by the tariffs, it will cost you a lot more if jobs are shed as a result of cost-cutting efforts.
In the aggregate, our economy is big and less dependent on imports than our trading partners. Trump can afford to be a bully (a poker term) in this poker game, but he’s playing with other people’s money this time when he builds up the pot in this high stakes game. China’s economy is also big, and the government has plenty of its country’s money to throw around.
History shows us there’s little to be gained economically from tariffs. We don’t know if our hand is the best or if our opponents will fold, but the underlying concern many of us have is the premise that winner takes all. In the game of global trade, a bigger pot is supposed to benefit everyone.
Not Counting Cards but Need to Keep Track?
Here are two sources that are reliable and present the state of play in a digestible way.
For an elegant table with links to official tariff lists maintained by Crowell & Moring, click here.
For an interactive timeline of key events as the tariff war unfolds by the Peterson Institute for International Economics, click here.