War Of The Wares

 

The U.S. is at war!  Fortunately, it is not a war of the worlds involving aliens invading from another planet. No, the current war is a bit less dramatic. It is a trade war between the U.S. and China, the world’s two largest economies.  While no Americans will be sent to the front lines to fight this war, the war is bound to negatively affect the bottom line of the American consumer’s  budget. So it pays to be in the know about what’s going on.

A trade war is not a conventional war. No bombs or bullets are utilized. The weapon of choice?  A tariff. Tariffs have nothing to do with the military; they are an economic weapon. To be precise, a tariff is a tax or duty to be paid on a particular class of imports or exports.

Tariffs are not a modern innovation. No, sir.  In fact, the very first act passed by Congress under our Constitution was a tariff law; this 1789 law imposed tariffs up to 50% on imported steel. In fact, tariffs were the greatest source of federal revenue until the federal income tax was established in 1913.

Be aware that we are living in historic economic times.  The U.S.’s current trade war with China is likely to eclipse the Chicken War of the 1960’s. What? You’ve never heard of the Chicken War? What kind of American history books are they writing?

In the Chicken War, France and West Germany were the U.S.’s enemy instead of China. The bad guys imposed a tariff on imports of U.S. chicken which were voluminous since Europeans considered chicken a delicacy. American chicken exporters squawked at the tax; in retaliation, the U.S. imposed a punitive tariff on light trucks (think VW vans), brandy, and other European products. .(Trade) war is hell, and the tariff on brandy was soon lifted as sober U.S. heads prevailed and took heed of the complaints of diSPIRITed U.S. imbibers unhappy about paying more for their imported spirits.

Fast forward to July 6, 2018 when the current trade war began.  The U.S. imposed 25% tariffs on $34 billion of Chinese goods in response to complaints that China steals or pressure U.S. companies to hand over technology. This move made good on a campaign promise made by Donald Trump to crack down on Chinese trade practices which have cost American jobs. Take that, Beijing!  China fired back by imposing higher tariffs on a similar amount of U.S. goods. Back at you, Washington, D.C.!

China asserts that the U.S. is being a bully and is igniting the largest trade war in economic history. But, of course, China does not want to change the economic status quo. Why not?  Because the U.S. has a $375 billion U.S. goods trade deficit with China. That’s BILLION with a “B.”  In 2016 China was the leading supplier of goods imported to the U.S.  China imports far less from the U.S. than the U.S. imports from China.  It’s top import from the U.S. by value is soybeans. (Soybeans?)

So each country has imposed higher tariffs on certain goods of the other country.  Now what?  Round 2, naturally. A possible second round of tariffs targeting a $200 billion list of thousands of Chinese products is being considered by the U.S. The first round of tariffs focused on Chinese industrial products in an effort to reduce the direct impact on the American consumer.  The new list under consideration is more extensive, containing consumer products such as vacuum cleaners and furniture. I’m no economic expert, but I’m pretty sure that China’s response will be to raise tariffs on additional U.S. goods  exported to that country.

Where will this economic madness end?  My bet’s on the U.S. coming out on top. The bad news is that our country has a gargantuan trade imbalance with China; China only imported $130 billion of U.S. goods last year, and the U.S. already has a trade deficit exceeding that amount for 2018 as of May 31st of this year. The good news is that China’s imports of U.S. goods are small enough that at some point it cannot match new U.S. tariffs. Nanny, nanny, boo, boo, Beijing!!!

In the meantime, what will happen?  Well, hang on to your hat!  Don’t have one? You better order your “Make American Great Again” cap NOW.  IncredibleGifts, which imports red hats from China and embroiders them here with that phrase, will have to raise prices if the hats end up having to be made here in the U.S. as opposed to being made in China, shipped here, tariff imposed and then embroidered in the U.S.  The cost of these hats could skyrocket from $9-$12 to $20.  That’s not great!

The mounting tension between Beijing and Washington, D.C. provides an economic summer blockbuster. Despite the possible ramifications of the trade war, the average American is hardly on the edge of his seat following the plot. Why?  Apparently red ink is less captivating that bloodshed. Perhaps all that is needed to catch John Q. Public’s attention is a catchy name for this war. But it’ll be hard to top the Chicken War. Maybe we could just refer to the situation as “America’s Got Tariffs.”

JUST WONDER-ing:  Had you ever heard of the Chicken War? Were you aware that China and the U.S. were in a trade war? To what extent do you follow economic news?

 

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