Recent word from the White House was grim. For reasons that were not entirely clear, the President planned to leverage international trade by imposing an historic ‘temporary’ tariff increase of 250% (from 10% to 25%) on a wide range of foreign-manufactured goods that enter the U.S. Presidential supporters and critics alike were perplexed. Why the sanctions, why now, and what does this mean for American consumers and businesses? Will it cost more to buy a car? Will there be fewer consumer goods to select from? Will our grocery tab increase? In this article we’ll examine the facts and explore the possible outcomes.
What it is: The United States has proposed a “temporary” tariff of 25% levied on goods manufactured in China, Mexico, and other countries. This action marks a radical policy departure. In fact, every President since the New Deal has backed efforts to minimize or to eliminate trade barriers. This action has effectively promoted economic prosperity as well as has contributed to improved relations between nations.
What brought it about: Economists seem to generally agree that these trade agreements or disagreements are a long shot attempt to strengthen U.S.-based manufacturers. It is viewed as a forced attempt for Americans to buy American. This scheme is actually short-sighted as many manufacturers, such as those in the automotive industry, send raw materials for steel manufacture to Asian countries. Detroit’s automakers then buy the finished, foreign-made auto parts to assemble their vehicles. This process sounds convoluted but in truth is far less expensive than it would cost if those same parts had been made in the U.S.
Look closely at that Subaru you drive. See the little decal in the back side window? Yup. It is assembled in Oklahoma, U.S. A. from parts, some of which have been manufactured abroad to keep the vehicle’s sticker costs down. The only question that remains: Will an Outback that costs 15% more still be attractive to American drivers? Can hardcore Asian-import drivers turn to GM? And just what percentage of the vehicles manufactured in Detroit are actually fully American-made?
What it brought about: Tit for tat on a global scale. No sooner had the levy been announced than opposing nations levied similar tariffs on American-made goods. Gentlemen, it would appear the U.S. has sparked an international trade war.
What it means to U.S. Consumers and Businesses: Basically, for the duration, or until these tariffs are lifted or reduced, everyone is going to have to ante up for roughly 15% more than they would have paid for the same goods prior to these restrictions being imposed. That is because even though the tariffs have been raised to 25% for imported goods, the U.S. had already been charging 10% for goods imported into the country.
Items are going to increase in cost, but not value. It will have multiple effects: fewer new imported cars will be sold, and quality used vehicles will increase in value. And we will all receive an economics lesson when we learn just how many products that Americans cannot do without are manufactured in Asia: Here is a partial list:
- Electronics- computers, audio systems, cell phones, home security systems, lawn mowers, we already covered automotive, but let’s not forget trucks, especially long distance trucking vehicles.
- Clothing and apparel, footwear.
- Household goods such as beds and bedding, furniture, appliances, vacuum cleaners, decor, luggage, tools, and recreational equipment.
- Food: According to Fortune, 70% of our vegetables, and 40% of our fruits are imported from Mexico. Fresh food will cost consumers more at the checkout counter. A possible solution would be to establish a victory garden and grow one’s own food, or to support local farmers and, just like our ancestors, can, preserve and store food for the non-growing season.
Who is most likely to be impacted? Big box stores that maintain 40K worth of different products. These source most of their inventory from China. Since these stores are known for the relative quality of their products for the price, raising prices might cause their consumer base to turn elsewhere.
Small manufacturing businesses. American manufacturing is also its economic backbone. However, in just about every town there are small businesses that create parts that combined with parts by other manufacturers around the country, are purchased by major manufacturers for use in machinery as well as on production assembly lines. The range is varied and includes: drill presses, gauges and calibration equipment, construction equipment such as backhoes, and excavators, equipment used in materials manufacture such as extruders, and polishers, etc. These need to be manufactured and maintained and for that one needs new and used parts.
Consumers: As for consumers, economists dismiss that China will be paying for the imposed tariffs. Instead, they claim that U.S. taxpayers will foot the bill by paying higher prices for the products and services they need. Buying will become more needs-based, with far less impulse buying that accounts for a percentage of overall consumer sales. There is already a trend towards buying used clothing and accessories. Not only does it bring that designer handbag within reach, but the movement is a step towards decluttering landfills, said to be almost entirely composed of used textiles. Consumers will consider leasing their vehicles. Some who are committed to car ownership will hold on to their cars longer, and learn to bypass the dealership for OEM replacement components turning instead to secondary markets and quality used automotive parts when their vehicles need repairs.
What are the Benefits? Long term, will the tariffs increase sales for American-made goods and services? Possibly, but only if the quality can justify the spend. Also, as implied previously, due to trade agreements, many U.S. manufacturers collaborate with foreign firms to create products that are sold in the U.S. if not wholly manufactured Stateside. Will the tariffs create more jobs in the U.S.? That remains to be seen, but is a possibility, however remote at this time.