Tariffs And Tourists And Trade Wars, Oh My! : The Indicator from Planet Money The U.S. trade war with China escalated this week. The Trump administration might be underestimating how many options the Chinese government has for responding to American tariffs.

Tariffs And Tourists And Trade Wars, Oh My!

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On Monday, the Trump administration imposed a new round of tariffs on about $200 billion worth of Chinese goods that Americans import every year. The Chinese government has retaliated with new tariffs on $60 billion worth of U.S. goods that American companies export to China every year. These actions represent a big escalation in the U.S. trade war with China. So it is time for a trade war update. This is THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia. And when we need a trade war update, one of our favorite people to call is Chad Bown. He's an economist at the Peterson Institute and the co-host of a wonderfully geeky podcast called Trade Talks. You can guess the topic.

CHAD BOWN: Everybody's interested in tariffs, right?

GARCIA: After the break, Chad explains the latest round of tariffs on China, what they mean for the U.S. economy and where this trade war could be headed next.


GARCIA: OK, Chad Brown, Peterson Institute economist, let's get right to it. The United States just imposed tariffs on $200 billion worth of Chinese goods. I want to start with, like, a kind of very broad overview. Chad, how would you characterize the scale of the tariffs that the U.S. has imposed this year - not just on China but on all countries combined?

BOWN: I think what I would do is I would just add up all of the imports that are now subject to new tariffs that President Trump has imposed, you know, since the beginning of this year. And so starting in January, he did new tariffs on solar panels and washing machines. That seems like a long time ago at this point. Then in March through June, it was steel and aluminum. And then June - July, August and September, it's been these tariffs on China. So when you add all these things up, now we're looking at about, you know, around $300 billion worth of U.S. imports from the world. That's about 12 percent of total U.S. imports, all of a sudden, that are subject to these new tariffs.

GARCIA: That's a lot for a single year.

BOWN: That is a real lot. This is not something that we generally see happen. There's very few episodes, at least in modern history, where you could claim to see new tariffs of this scale actually being imposed.

GARCIA: OK. So like, in thinking about the tariffs that we've imposed on the goods that we import, a lot of people have been kind of surprised that this hasn't had more of an effect on the U.S. economy itself, which is still growing at a healthy pace. The labor market is strong. And even, you know, financial markets, like the stock market, is still going up and up. How would you sort of characterize the likely effects of all these tariffs - both in terms of the direction they'll affect the U.S. economy and in their magnitude? How would you describe it?

BOWN: So most of the tariffs that President Trump has imposed so far aren't on final goods - aren't on things that, you know, you and I would go out and buy at Walmart or Target or something like that. Most of them are on what are called intermediate inputs or capital goods. So when you look at the list of products, they are things with the word parts in it - so parts of fans, parts of computers. And so these are the inputs that companies need to make their goods and services that they're going to then sell to American consumers. But ultimately, it will take a while for the costs of these higher priced inputs to actually feed through into the American economy.

And we're starting to see some of that. The most recent example to me is we saw a company called the American Keg Company - so what they do is they make refillable stainless steel kegs. Well, their big concern is - their big input cost is steel. The price of that went up. Their main competitors are not some other American companies. Their main competitors are kegs coming in from Germany and Mexico and China. And they basically - they too have now gone to the American government to say, hey, we can't compete. So it's not only that we're going to see, you know, these effects showing up through higher costs, but we're going to see other industries coming forward and saying, hey, I want some of that tariff action too.

GARCIA: Yeah, loss of competitiveness for American companies - that's an underrated effect of tariffs, right?

BOWN: It's actually a very, very large effect. And so when you raise the price of all of these inputs, that's going to increase their costs. Now, that makes it costlier for them to sell their products within the United States, and that's a big deal. You know, there's 300 million consumers in the United States. But it also raises their cost and makes them less competitive trying to sell their products globally. And this is the kind of thing that's really going to reduce the competitiveness of American companies and make producing, investing in America - providing good American jobs - a less attractive opportunity.

GARCIA: And Chad, in the case of China, the U.S. has a few specific complaints here. So one is that the Chinese government either steals or it forces the transfer of technology from American companies to Chinese companies. Another complaint is that the market to sell stuff to Chinese people is skewed way in favor of Chinese companies and against American companies in all kinds of ways - and then finally that China has kept its currency weak in the past so that it's cheaper to sell Chinese products in the U.S.

And in fact, the U.S. does import way more from China - like $500 billion worth of stuff - than China imports from the U.S. I think the number there is only a little more than $130 billion. That is a huge difference. And the thinking is that the trade war will then hurt China more because China does not have as many products that it can put tariffs on. The U.S. has way more targets. You've said in the past though that the Chinese government actually does have other options to hurt the U.S. besides tariffs. So what are some of those options?

BOWN: There's a number of different ways beyond just imposing higher tariffs on American goods that China can retaliate. One is we also trade. We also - the United States exports a lot of services to China. And a lot of those things are in tourism or Chinese students coming to the United States to study in, you know, either high school or college or graduate programs. And there's lots of other places around the world that Chinese students could go to or Chinese tourists could visit. And so that would really be a big hit on the services side of the U.S. economy.

Other things that they could do - American companies do sell a lot of their intellectual property to companies in China, or they license their intellectual property. You know, part of the complaint is that, you know, we may not feel as though we're getting remunerated enough for our ideas in China. But China does pay really large amounts of royalties to be able to use American technology. China might stop paying that. Even when we think about the tariff issue, in addition to just simply imposing higher tariffs on American goods, the other thing that China can do is they can actually lower their tariffs toward goods coming in from other countries.

And we've seen China do this when it comes to the example of automobiles. So in retaliation to President Trump's tariffs, China has imposed a 25 percent extra tax on cars coming in from the United States. But at the same time, they lowered their car tax to automobiles coming in from Japan or Germany or South Korea. So that means now not only do American companies have a more difficult time competing in China with Chinese companies, but they even have a more difficult time competing with German automakers or Japanese or South Korean automakers in that Chinese market as well.

GARCIA: We have these specific complaints against China. And I guess I'm wondering if you think there's a better way to go about this than tariffs on our side that are then, you know, retaliated against with tariffs on the other side? Like, how else could the United States potentially address the complaints against China that a lot of other countries also believe are legitimate?

BOWN: Behind the scenes right now, there are actually some talks and some negotiations taking place about how to deal with these big fundamental underlying concerns with China. Now, they're not talks with China yet. But they are - at the moment, seem to be negotiations led by the European Union, Japan and perhaps even the United States to write new rules that would confront and engage China on these issues that, you know, all of these economies really have with China - the idea being that they might be able to then present these new rules to China. And maybe China would be willing to sign up to that.

And in exchange obviously, you know, a lot of these tariffs that have been imposed would have to go away. But that might be a way to ultimately get us out of this mess - to have all of the major players out there coming up with a new set of rules effectively to get especially China to do the things in the global trading system that it hasn't been willing to do so far. We're still a long way away from really having any serious negotiations between these countries sat down.

GARCIA: Chad Bown, thanks, man. It's always a pleasure.

BOWN: Thanks for having me.

GARCIA: In fact, we'll probably have you on plenty more times between now and the end of the year - I'm guessing.

BOWN: I can hope not, but any time.

GARCIA: (Laughter).


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