The months-long trade war between the U.S. and China entered a new high-stakes phase last week with the Trump administration’s move to increase tariffs on some $200 billion worth of Chinese imports as it pressures the Asian nation’s leaders to sign a sweeping trade deal.
Days later China announced that it would impose additional tariffs on some American goods in retaliation, starting June 1. The news sent markets into a nosedive, with the Dow and Nasdaq both dropping more than 2%.
The White House’s new policy means that starting May 10, more than 5,500 categories of Chinese-made goods headed for the U.S. were subject to a 25% tariff, up from the 10% level set by the Trump administration last year. Administration officials have characterized the tariffs as a bargaining tool to force China into an agreement that protects American intellectual property and reduces a steep trade deficit.
This is a rapidly developing situation, and the ramifications of these policies for consumers, markets and the economy are still coming into focus.
While President Donald Trump has claimed that China will bear the brunt of cost from the tariffs, critics, including many business groups, argue that U.S. businesses and consumers will pay the bulk of the increases through higher prices.
While the initial round of tariffs was focused largely on products that business and industry purchased from China, the latest 194-page list of tariffs includes many consumer products (see the official list here) found in retail stores across the country — including seafood, luxury items and electronics.
Multiple studies in recent months have concluded that U.S. consumers of Chinese imports will absorb the majority of the costs of the tariffs. A discussion paper published in March by economists from the Federal Reserve Bank of New York, Princeton University and Columbia University concluded that “the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born by the consumers of imports.”
“We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices," the paper’s authors wrote.
White House economic adviser Larry Kudlow acknowledged Sunday that the tariffs will affect American consumers, but he implied they are a necessary risk to reset unfair trade practices with China and predicted that they’ll have no effect on the strong overall economy.
Business and Economic Impact
Other researchers don’t share Kudlow’s optimism. A study by Oxford Economics estimated that the U.S. economy could lose $62 billion in economic output by next year if the 25% tariffs remain in place, which translates to an equivalent loss of $490 per American household. That estimate did not account for retaliatory measures from China.
Meanwhile, a number of business groups have pushed back against the tariff increases. The National Association of Home Builders estimates the duties will cost developers $2.5 billion a year, while the Center for Automotive Research estimates the tariffs will increase the cost of U.S.-made cars by an average of $190 apiece, according to a report by The Associated Press.
The National Retail Federation issued a statement from its senior vice president for government relations, David French, calling the tariffs “taxes paid by American businesses and consumers, not by China.”
“A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses, especially small companies that have limited resources to mitigate the impact,” French said. “If the administration follows through on this threat, American consumers will face higher prices and U.S. jobs will be lost.”
Overall, we continue to expect that this latest round of tariffs will impact portfolios in a localized, that is stock-by-stock manner, and preemptively evaluate all holdings under the potential for continued escalation.