On Thursday, May 30, 2019, US President Donald Trump announced plans to impose a 5 percent tariff on all Mexican imports by June 10, 2019. He also warned of the possibility of increasing the tax to 25 percent if Mexico does not take immediate action "to dramatically reduce" the number of migrants that illegally cross the border into the United States daily.
The warning comes just weeks after stalled trade talks between China and the US led the American leader to increase tariffs on $200 billion worth of Chinese goods, from the current 10 percent to 25 percent, on May 10, 2019. Mr. Trump has also threatened to impose a 25 percent fee on an additional $325 billion worth of Chinese imports, if an agreement is not reached by June 17, 2019. China retaliated by imposing a tax of between 10 to 25 percent on $110 billion worth of US imports starting June 1, 2019. Why is the US in a trade war with two of its biggest economic partners, and why should it matter to Americans? Read on . . .
What Is A Trade War?
A trade war is just like any other war, except instead of physical combat, the warring nations stage a battle against each other's goods and services. They can do this by either adding a tax to the cost of an import, which is what Mr. Trump is doing, or by imposing a quota. This means limiting the number of items that can be imported from the "enemy" country.
How Do Tariffs Work?
If a domestic product typically costs $10 and a similar imported version costs $9, most consumers would gravitate toward the cheaper option. Slap a tariff of 25%, however, and the price jumps to an "expensive" $11.25, making the domestic product a bargain!
So Tariffs Are Beneficial For The Local Economy Right?
Given that tariffs can make some domestic goods cheaper, they should theoretically provide a boost to the local economy. However, things are not as straightforward in the real world. While the taxes may help specific industries, such as the US steelmakers, who benefited from the 25 percent tariff imposed on raw materials in May 2018, they could hurt others — in this case, US car and aircraft manufacturers that rely on imported aluminum also affected by the tax. To maintain their profit margin, companies often pass on the extra cost to consumers, which means that Americans may have to pay more for everything - from cars to airline tickets, to even soda cans! Additionally, there may not be domestic substitutes available, leaving consumers with no choice but to continue buying the more expensive imported items.
Since most countries retaliate by enforcing import taxes of their own, tariffs often result in trade wars. For example, China has already added hefty tariffs on US agricultural and industrial products, such as soybeans, pork, cotton, aircraft, and cars, and pledged to take additional countermeasures following Mr. Trump's most recent proposed taxes.
Why Did President Trump Decide To Levy Tariffs?
President Trump's trade dispute with China is an attempt to convince the Chinese government to buy more American goods and services to help reduce the trade deficit — the amount by which the cost of American imports exceeds the value of its exports — which reached a new record of $419.2 billion in 2018. The tariffs on Mexico are to force the country's officials to be more vigilant about stopping the increasingly large number of asylum seekers, from Guatemala, Honduras, and El Salvador, from entering the US illegally.
What Goods Will The Tariffs Impact?
Some of the Chinese imports already being impacted by the taxes include a wide variety of minerals and oils, textile products, scientific instruments, and even exotic foods like frog legs! The new tariffs, scheduled to go into effect on June 17, 2019, target a broader range of consumer products, such as laptops and cellphones.
What Happens Next?
Given that the escalating trade wars between the US and its two biggest trading partners could have a global impact, it is in everyone's interest to get things resolved. Beijing has already taken a few steps to address American concerns, including agreeing to buy more US agricultural products and approving a foreign investment law. Though a white paper on the country's official position, released on Sunday, June 2, 2019, blamed the US for the breakdown of trade talks in May, it also showed a willingness to resume the stalled negotiations. If a compromise can be reached, it could increase American exports to China and help reduce the large trade imbalance between the two countries.
Meanwhile, Mexican President Andrés Manuel López Obrado, who is sending a delegation to Washington, DC, to discuss the dispute with US officials on Wednesday, June 5, 2019, has agreed to increase border controls. “The main thing is to inform about what we’re already doing on the migration issue, and if it’s necessary to reinforce these measures without violating human rights, we could be prepared to reach that deal,” Obrador said. Hopefully, politicians from all three countries will be able to reach a resolution soon.
Resources: BBC.co.uk, theGuardian.com, scmp.com, CNN.com