Why Trade Wars Raise Prices

The U.S. and China have been trading blows recently in their ongoing tariff disputes. Each side issues new threats every week or so, and they receive their due coverage in the media. But most of that coverage is political in nature and doesn't translate to much for the average person. That is, until it does. Because in the end, trade disputes translate to higher prices on the goods that Americans consume every day.

A Tariff Is Just a Tax

The term "tariff" has a certain mystique to it. But in simple terms, a tariff is nothing more than a tax imposed by a government on imports. When an American company imports a product made in China into the U.S. for distribution and sale in the American market, the U.S. government will charge the importer a fee for permission to bring the Chinese product into the country. For the last few years, the average tariff rate charged by the U.S. government on all Chinese goods has been around 145% (Yes, one hundred and forty-five percent). So for example, if a Chinese made iPhone costs $700 to be shipped to the U.S., the total amount that the importer would pay for the right to distribute the iPhone in the American market would be $1,645. (Note that this example does not include distribution, warehousing, marketing, or other costs that would be added to the price of the iPhone when it is sold in stores to American consumers).

And companies don't just absorb that cost. They pass it straight to you.

Take a look at your living room. Is your TV made in the U.S.? Most likely not. Most TVs are made in China. That iPhone in your pocket? Made in China. Those Nikes you're wearing? Made in China. The list goes on. Many products that Americans buy on a daily basis are either made in China or contain parts made in China. And because of these tariffs, prices for those goods have increased dramatically for the average American consumer. According to one report, the average household is paying an additional $1,500 per year because of these tariffs. For many families, that's equivalent to the cost of a car payment or a month's worth of groceries.

So Why Does the Government Do It?

The increased cost to American consumers should have some tangible benefit. The goal is to pressure China into fairer trade practices, bring jobs back to the U.S., and reduce our dependence on a country that doesn't necessarily have our best interests at heart. While these are real goals, they will take years to happen. In the meantime, the $1,500 per household that they are costing right now could have been better spent.

Building new plants and training workers to fill them takes years. So higher prices are already here, and the benefits aren't yet.

China Fought Back

But China was not about to let the U.S. get away scot-free. They levied their own tariffs on U.S. goods, focusing particularly on soybeans and agricultural products. This put the squeeze on farmers in the Midwest who had relied on China to purchase massive amounts of their crops. In some cases, farmers received government bailouts in order to stay afloat.

A trade war is when two countries impose tariffs on each other's products in an effort to get the other to back down. But in reality, both countries' consumers end up paying higher prices. So while a trade war may be a fight between two countries, it is really two governments making life more expensive for their own people.

Who Actually Wins

Few really win a trade war. American companies who make their products in the U.S. and don't rely on Chinese imports are probably the clearest winners since their foreign competition just got more expensive. But that's about it. Some jobs have returned to the U.S., but not nearly enough to offset what consumers are losing. Most economists agree the math just doesn't work out.

The Bottom Line

Trade wars don't have a clear winner. In the short term, most parties lose. The average American consumer loses. American farmers lose. American businesses lose. The jobs that have come back don't come close to covering the $1,500 the average family is losing in higher prices every year. So the next time you hear someone talk about a trade war, remember what it really means: paying more for everyday stuff to protect a small number of jobs that most Americans don't work in.