No One Wins a Trade War

Trade War

Tired of reading about more tariffs? You’re not alone. On May 10, 2019 tariffs increased to 25% up from 10% on $200 billion worth of Chinese imports after American officials accused Beijing of backtracking on earlier negotiations. And it wasn’t long before China responded. China announced increases to tariffs on $60 billion worth of American goods. Tariffs of 5% to 25% took effect June 1 on about 5,200 products from the US, including batteries, coffee, and spinach. But the tariffs don’t end there.The US  indicated that remaining untaxed Chinese goods could be hit with a 25% tariff “shortly.” Though the President said he hasn’t yet decided whether to impose those additional duties, if implemented, roughly $300 billion worth of Chinese products would be taxed. Many of those items are consumer goods like toys, shoes, and smartphones. Some maintain there is justifiable cause for the continuous increase in tariffs, but there’s no denying the uncertainty that the situation has created for businesses and consumers alike. If history has taught us anything, it’s that no one wins a trade war.

A brief history lesson

Let’s go back to 1930. At the time, Congress was looking to protect US businesses and farmers from the economic problems of the Great Depression. To do so, they hiked tariffs on all countries that brought goods into the US. The associated legislation became known as the now-infamous Smoot-Hawley Tariff Act, named after its two sponsors, Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon. They may have been attempting to protect American interests, but the outcome certainly wasn’t what they anticipated or intended. In fact, many have blamed the Smoot-Hawley Tariff Act for worsening the Great Depression.

The 1930 legislation imposed steep tariffs on some 20,000 imported goods, making many everyday items unaffordable for Americans who were already dealing with the economic troubles of the time. For example, milk went from 2.5 cents per pound under the Tariff Act of 1922 to 6.5 cents per pound in 1930. That may not sound like much of an increase, but remember we’re talking about 1930, and an almost 3x increase in the cost of milk, an essential food item. Shoes and boots, which weren’t taxed before 1930, were hit with a 20% tariff.

Naturally, the tariffs angered the US’s trading partners who responded with their own tariffs on American products. That resulted in American exports plummeting from $7 billion in 1929 to just $2.5 billion in 1932, with farm exports dropping to one-third of their level in 1929 by 1933. And overall global trade fell by about two-thirds in the four years after the legislation was enacted.

The tariffs were finally repealed in 1934 when the Reciprocal Trade Agreements Act was signed. However, the effects of the disastrous tariffs, which included discrimination against US exports, lasted for decades. Is the impending trade war with China the exact same as what happened back in 1930? Certainly not. But the Smoot-Hawley tariff fiasco still offers a cautionary tale that shouldn’t be ignored.

Who pays in a trade war

One similarity between the 1930 tariff hike and current trade conflict is who’s ultimately affected: American businesses and consumers. Tariffs were expected to yield the US Treasury billions of dollars. However, the reality is that American businesses and consumers end up paying the price of the tariffs on China. White House economic adviser Larry Kudlow conceded to that fact in an interview with Fox News, saying that “both sides will pay. Both sides will pay in these things.” A paper written by economists at Columbia, Princeton, and the New York Federal Reserve found that the President’s tariffs were costing US consumers and businesses an additional $3 billion per month in added tax costs by the end of 2018.

“[Tariffs] are a tax on the American consumer,” said Henry Paulson, who was treasury secretary for George W. Bush, during an interview on Face the Nation. “Will this hurt us? If it persists too long, it will. There will be a cost to it.” There’s also the projection that the potential additional tariffs would be devastating to American retailers. According to analysis from UBS, the industry could lose $40 billion and see 12,000 stores close in just one year.

The National Retail Federation has confirmed these numbers, and created a fantastic video series highlighting some US small businesses affected by tariffs. These entrepreneurs come from all walks of life in different parts of the country, from Michigan to California.

From Michigan to California

One of these business owners, Jimmy Edwards, explained the drastic effects tariffs will have on the ability of small businesses to innovate, and find dynamic solutions for problems they face. “Retailers like us…are evolving, they’re changing, they’re responding to consumer demand, and we’re doing it well. So, anything that might disrupt how we’re doing business right now is a concern for me, and for all 300 of my employees.”

Jimmy is the President and CEO of Marshall Music, a 70 year old business in Lansing Michigan. Marshall Music helps 600 school music programs across the state and, as Jimmy explains it, the domino effect of these tariffs could stifle his ability to help bring music to these schools. These are the kinds of things businesses and consumers can expect from this trade war. It’s not all about cash flow and supply chain management. Real people are affected by these tariffs, and they aren’t all business owners.

Global growth

The consequences of an all-out trade row between the US and China would also have implications far outside of either country’s borders. (Also, not unlike the Smoot-Hawley Tariff Act.) After all, you can’t have something as significant as a trade war take place between the world’s two largest economies without it having some effect on global markets. Which is why it’s no surprise that trade is at the top of the agenda for the G20 summit on June 28 and 29. The International Monetary Fund (IMF) has repeatedly warned that trade tensions between the US and China pose a “threat to the global economy.”

“That is why we need to work together to reduce trade barriers and modernize the global trade system – so that we all win,” Christine Lagarde, IMF’s managing director, recently told the US Chamber of Commerce. Robert Koopman, chief economist for the World Trade Organization, has stated there’s evidence the trade tensions between the US and China are “rippling through supply chains and dragging on the world economy.”

One such indication is recent data of China’s imports during May. The country saw products from Japan, South Korea, and the US drop significantly year over year. While the decrease in products from the US (27%) is par for the course with the tariffs, the drops from Japan and South Korea (16% and 18%) indicate the far-reaching global effects of the ongoing trade tensions. Of course, many of these scenarios are only projections of what could happen. But therein lies one of the biggest problems with this and any other trade war: the true, long-term ramifications it will bring aren’t known. And we likely won’t know them until it’s too late to change course.

There’s only one thing that’s certain about any trade war. No one wins.

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