In July 2018, the US placed 25% duties on imports of around $34 billion from China. In a mirror move, China retaliated by imposing a 25% tariff on 545 goods originating from the US worth $34 billion, including agricultural products, automobiles, and aquatic products. This marked the beginning of a trade war between the two countries that has since then escalated rapidly.
What does this mean for the American consumer, who is effectively caught in the middle of a state-level trade confrontation? Can American consumers sustain the immediate shock of the consequent price rise, and maintain the standards of living they are accustomed to?
Tariffs and prices
In 2018, the US imported $539 billion worth of goods from China. This made up more than 21% of the value of all goods imported by the country. According to the United States Census Bureau, Chinese cell phones, computers and computer accessories, telecommunications equipment, toys, and apparels are the top products in the US import basket that are ubiquitous among US consumers.
The current US-China trade war is expected to cause an imbalance in the demand and supply of these goods in the market, forcing consumers to pay more for every unit of goods bought. Consumers have not yet dealt with the price increase directly as larger companies have been able to absorb the costs until now. However, a reallocation of costs is inevitable.
According to recent research, the American consumer is now expected to pay, on an annual basis, more than over $8.1 billion for cell phones, $8.2 billion for laptops and tablets, $4.4 billion for apparel, and $3.7 billion for toys. They will be forced to pay $1.6 billion more per year for household appliances, and $4.6 billion more on furniture. These higher prices will naturally impact consumer spending, with negative consequences for their standards of living.
Are alternative solutions available?
With imports from China becoming expensive in this trade war, American retailers are expected to either shift their sourcing of goods to another relatively less effective supplier country, or bring the sourcing back to the US itself.
The option to shift sourcing from China is going to be a lengthy and tedious process. In the event that retailers shift sourcing back to the US, it will come with a cost higher than goods imported from China. In both scenarios – whether a foreign supply source or domestic – new partner producers will find rather large, Chinese supplier-sized shoes to fill, and will be under immense pressure to meet the large quantity demands with the same level of quality and “time to market”. The competitive edge that China has over countries like Vietnam, Mexico, Malaysia, Indonesia, India, Bangladesh, and others will make the shift logistically and financially difficult for US importers.
Further, any attempt to shift sourcing could have important consequences for the US employment rate as well. In cases where American companies continue to import, higher procurement prices for goods will make it untenable for the retailer to continue sales. This supply-side disruption is obviously going to be anticipated, eventually forcing the retailers to lay off workers. Its chain reaction will produce an income effect by lowering purchasing power, thus hitting spending and standards of living. A Brookings Institution study has estimated that about 2.1 million jobs would be disrupted across 40 US industries following retaliatory Chinese tariffs.
Counter to this argument, another study says that the one-time net impact of tariff imposition on American jobs is expected to decline by 2,235,400 within one to three years, with an increase in jobs in the manufacturing sector. This could be attributed to the positive impact of shifting of source to domestic employment, with companies hiring more workers to support demand. This would then likely induce a positive income effect, leading to higher consumer spending and better standards of living.
Clearly, the economic impact of the US-China trade war is dependent on a whole host of economic variables. And, as it stands the jury is still out on the net gains and losses of a definitive shift in the sourcing of goods to compensate for erstwhile Chinese purchases, with arguments on both sides of the narrative.
Ultimately, this impact will be shaped by decisions taken by American importers – how they reorganise the supply chain, as well as of course US-China relations. While the long-term consequences of the trade war remain to be seen, the short-term impact will directly impact consumer choices. The US trade community waits in anticipation of some relief.
Prerana Priyadarshi is Senior Researcher with the Institute of Peace and Conflict Studies (IPCS), New Delhi, where she leads their work on political economy.