Trade wars, tariffs, Trump, EU vs US, US vs China….it’s all been in the news this week. But what is a tariff, what does it mean, and how does it affect you and me?
1. What is a Tariff?
A Tariff is a tax on a product made abroad. The aim behind tariffs is to make items coming into the country more expensive than local products, consequently boosting your own country’s economy.
2. What is a Trade War?
Pretty self explanatory – a trade war is when countries attach each other’s trade with taxes – tariffs. One country raises tariffs against another, and then the other responds, and so it goes on….this can have an effect on other nation’s economies and cause political tension.
3. What’s Trump done now?
The US President has started a trade war with China by imposing steep tariffs on billions of dollars’ worth of Chinese goods. His reasoning? He states that Beijing are guilty of stealing intellectual property. China responded by placing their own tariffs on $35 billion of US goods.
He tweeted: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
But more than that, during his election campaign, Trump made a big point about cutting the country’s trade deficits. He has also tweeted that he won’t let any country “take advantage of us on trade any more”.
4. What is a Trade Deficit?
Basically a trade deficit means you import more than you export. Trade deficit is the term for the difference between how much your country buys from another country compared to how much you sell to that country. You can reduce trade deficits by imposing tariffs, as President Trump is attempting to do. This is called protectionism: using tariffs to boost your own country’s trade and protect it from foreign competition.
5. The UK and Tariffs
The UK has a very import-heavy economy, meaning we import more than we export, which means tariffs have much less of an effect on us than other countries such as China, who export more than they import. However, direct tariffs on products like steel do have a ripple-effect on the corresponding UK industry, as it effects the market overall. The latest specific tariffs on US goods such as bourbon whiskey and Levi’s jeans will effect British consumers only in the raising of prices….but this is estimated to be an overall rise of £200 million per year in the price of consumer goods imported from the US.
6. The EU and Tariffs
Brussels – read the EU – have imposed tariffs on US consumer goods in an attempt to target the industries of states where Trump has most support. This is in retaliation against President Trump refusing to provide an exemption for the EU, who are technically his allies, in his tariff on steel and aluminium.
Goods already in the EU will not be affected, but anything leaving the US for Europe as of today (Friday 22nd June) will be charged the tariffs. However, as the affected imports only account for about 1% of all goods that come into the EU from the US, the impact should be contained.
7. What impact will this have?
Richard Lim, chief executive of ‘Retail Economics’ has warned Britain that, “Though the immediate effects on UK retailers might look relatively modest, it is worth paying close attention to this dispute because it’s future course is unpredictable, fast moving and could quickly escalate to engulf other, seemingly unrelated areas of trade.”
In other words, although the impact of tariffs and trade wars might not be immediately apparent, the ripple effect will ultimately reach everyone. Stock markets have already been hurt by the imposition of tariffs, and the retaliations from China, Mexico, Canada and the EU against US tariffs have been substantial. Companies are also getting worried, expecting sales under the new tariffs to be below previous years, because taxes will make their products more expensive.
8. Is this anything to do with Brexit?
For once, this is not a situation whose fuel has been ignited by Brexit. However, it is important in as far as the reality of Brexit goes. These new tariffs mean it will be even harder for Britain to reach a free trade deal with the US that might have made up for the economic impact of leaving the EU. Furthermore, the more protectionist (taxing imports to make it cheaper to use local materials) the world becomes, the less likely it is that the UK will be able to broker new trade deals after Brexit.
9. Why do I care?
According to the US, there is no reason for the everyday person to be concerned, as they say that they have only targeted imports that will not affect consumer prices. However, this is hotly disputed by retailers.
It might meant that your favourite orange juice is no longer in supermarkets because, without you realising it, it was imported from the US, and it’s now cheaper to get it from South America.
More significantly, China vs the US constitutes a big conflict that could affect the everyday Brit through companies such as Apple. If China retaliated and imposed a tariff on US tech companies, for example, Apple would be forced to raise its prices to compensate.
10. What next?
Interestingly, President Trump’s own party, the Republicans, are overwhelmingly against his tariffs, as they are big supporters of free trade(the opposite of protectionism – giving people the option to buy cheaper, better made products from around the world without tariffs), so this could mean a new tension in the party….but more globally, a trade war between China and the US would end up impacting consumers across the world, and would do nothing to abate the East-West world tension.
There’s no doubt about it, Trump has once again caused a global controversy. Is it one that can be reversed and salvaged at the last minute? We will have to wait and see..
Sources: BBC News, The Guardian, The Week