Tariffs, Trade Wars and You
“Closing the door to Chinese imports does not mean closing the door to access. What it means is we’re going to pay more for it.” Kevin Fandl, Fox Department of Legal Studies
What has caused the trade war between the U.S. and China? More importantly, what does it mean for you?
In this episode of Catalyst, we tap into the expertise of Kevin Fandl, associate professor of Legal Studies at the Fox School of Business, to gain a closer look at the trade war between the U.S. and China. Why has it grown between these two global superpowers in recent years, what has caused the U.S.’s deficit to China and how has the two countries’ relationship changed under former and current U.S. administrations?
Many of the products we use every day are “Made in China.” The U.S. purchases many more products from China than China buys from us. This large trade deficit has led to tension between the two countries, and it’s only escalated as both governments have tried to gain the upper hand.
Today, tariffs on Chinese products coming into the U.S. are taxed at 19%. While it’s meant to hinder Chinese companies’ abilities to sell to American citizens, it has only led to increased costs for the consumers.
For instance, in South Philadelphia, the city was working to protect bike lanes by installing plastic delineator posts. They eventually had to abandon the project, because the costs of the raw material needed for the posts had increased due to the trade war.
In this episode, Fandl, the executive director for Temple’s Center for International Business Education and Research (CIBER), discusses the nuances of the trade war and provides a broad view on how it is impacting American consumers. He outlines what the future in trade between both countries could look like and shares what industries are most affected.
How self-sufficient is the U.S.? How has the trade war impacted the American job market? These are some of the questions we tackled during our chat with Fandl.
Catalyst is a podcast from Temple University’s Fox School of Business about the pivotal moments that shape business and the global economy. We interview experts and dig deep into today’s most pressing questions, such as: What is the future of work? Will the robots really take our jobs? And how is my company using my data? We explore these questions so you can spark change in your work. Episodes are timely, provocative and designed to help you solve today’s biggest challenges. Subscribe today.
Host: Welcome to Catalyst, the podcast from Temple University’s Fox School of Business. I’m your host, Tiffany Sumner. And today we’ll explore a large-scale global issue: the trade war between the U.S. and China. I’m joined by subject matter expert Kevin Fandl of the Fox Legal Studies Department and the executive director for Temple’s Center for International Business Education and Research. I caught up with Kevin to discuss what started the trade war, what it means for the U.S., and how it will impact us all personally. Here’s what he had to say.
Kevin: The trade war itself, I think, is largely a facet of a couple of different things. One is, China’s growing faster than we ever thought they would. In the last 15 years or so, China has become a serious economic competitor to the United States. We just didn’t expect that. That was not something we anticipated when we supported China’s membership in the World Trade Organization in 2001. It was not what we thought the world was going to look like today.
But it’s not just China’s growth. It’s also the fact that China has found ways to very efficiently produce goods, to access other markets more rapidly than we ever could in the U.S., and also to offer the rest of the world a market of a billion people that are consumers, just like you and I, looking to buy goods and import goods. It’s been a really, really attractive market for many. But that has led to the big problem, the big elephant in the room, which is the creation of a trade deficit. And you’ve heard the president talk about this again and again, that the trade deficit is a thorn in his side, having us buy more goods from China than China is buying from America. That is a real problem for this administration and that’s part of why we have a trade war today.
Host: So the deficit is, the U.S. deficit to China, is why we have a trade war?
Kevin: The U.S. deficit with China, which means we buy more from them than they buy from us, that’s really one of the big facilitators of the trade war. But if I can just add, Tiffany, there’s one more thing that’s also bothering a lot of American firms, and that’s that China doesn’t always play fair. When American companies want to go to China, which we do, we love that huge market, but when we go there, China requires many American firms to transfer technology to them. They require us to actually hand over our designs, our information, that might be protected in the United States. But they want the ability to produce their own version of whatever we’re making. So anytime a U.S. business moves into China, and they’re bringing technology or scientific creations with them, they know it’s very likely to be copied in the near-term. But it’s still worth going.
Host: Is that an intellectual property issue or another kind of legal issue?
Kevin: It is an intellectual property issue. China has recently taken some steps back from that and they don’t require that from every industry anymore. So U.S. firms now can come into China without transferring all their technology over. But this is something that has allowed China to leapfrog ahead in their development to get beyond just raw commodity exporting or basic manufacturing. They are becoming much more high tech, much more able to produce consumer goods that you and I like to purchase.
Host: So in this situation, what led to the trade war happening at the end of 2019 as opposed to earlier?
Kevin: One of the things that really led to the trade war in this administration is a willingness to confront China. Under the previous administration, the Obama administration, there was a very clear awareness that China was growing quickly, becoming a huge behemoth on the global economic scene and stealing U.S. technology to a large extent. What is different is the Obama administration took a much more soft approach to deal with China. The main approach that the last administration took is that they created this large international trade agreement called the Trans-Pacific Partnership, you probably remember hearing about this during the election. That was one of President Obama’s largest achievements, was negotiating an agreement with a whole bunch of countries that are close to China but not calling China. And the idea was let’s just offset their power, let’s let them grow but let’s have some influence in the region. That was the soft approach taken by the last administration. The Trump administration is much more aggressive. And so they have gone face-to-face, really in what might be called trench warfare by the Chinese, by raising tariffs and trying to block China’s progress, China’s growth and force China to play by the same rules that we play by.
Host: That’s really interesting, so instead of an actual war, we’re having an economic war.
Kevin: Exactly. And we’re losing.
Host: I guess the playing field is equal in this war?
Kevin: It’s difficult to say that anything is equal is global economic relations, but China has some significant advantages right now, one of which is that they have a market of over a billion people, so there’s no business in their right mind in the world that does not want to sell to China. So they’re always going to be attractive.
The second thing that they have going for them is a very stable economy that is growing. So this is the U.S. at the turn of the 20th century when most of the world saw us growing so quickly, they migrated to our country to try to take jobs and get involved in that growth trajectory. So that’s happening in China. The third thing that they have going for the country is they have pretty effective leadership under Xi Jinping. President Xi has been pretty stable, even-keeled, in his response to economic recession, as well as his response to the global pandemic, and that has shown economic leadership in a way that the U.S. has not been quite able to do recently. So that’s really promoting Chinese success in this new world.
Host: Are there political implications of the trade war, or ramifications of the trade war?
Kevin: Yes, I think that there are. The trade war has largely hurt relationships between the U.S. administration and the Chinese administration in terms of developing mutually beneficial economic policies. So while before we were actually talking to China on a very regular basis, we’ve largely closed the door to those conversations. And because we’re taking a more combative approach, that’s leading to more combative political relations as well.
Host: So we’re in a trade war with China, and we’re losing, but how is China impacted?
Kevin: China is suffering a bit under this trade war. I would say that they aren’t suffering as much as we are in the U.S., but they are suffering. To give you a quick number, China used to be able to sell their products to us as U.S. consumers with an average tariff of 3%. That’s the tax that goes on those goods, very, very low. Whereas we were paying tariffs of 15 or 16% to get our goods into China. So we were paying a very high tax. Since the trade war started, our tariff on Chinese goods has gone to 19%, so that is a really tremendous change, and it’s really weakening the ability of Chinese firms, and U.S. firms in China, to get their goods into U.S. markets.
But to be perfectly fair, Tiffany, these taxes are being paid by you and I. We’re seeing these taxes in the form of more expensive washing machines, cars, electronic goods, shoes, textiles. We’re paying more for those, even though those taxes are supposed to be hurting China.
Host: I think that’s fascinating. Something we like to talk about in this podcast is the actual real-world implications of something like this, like how would we as consumers feel this in Philadelphia, on the East Coast or in the U.S.? And something that was brought to my attention about the time the trade war started was one of the first impacts it had on the City of Philadelphia is bike lanes. I’m a biker, I tend to bike to work every day when I go to work.
Kevin: Good for you!
Host: When I’m not working at home, I bike to work. I will say very tongue-in-cheek that there is a war between bikers and drivers in the City of Philadelphia. But no, to increase the safety of bicyclists, the City of Philadelphia was in the process of buying 250 plastic delineator posts for a bike lane on 11th street, and they actually had to stop production because the raw material used to manufacture the posts increased by 25% because of the trade war.
Host: It’s the first time I could see something that I read about in regard to tariffs and the trade war actually impact my life. What other ways do you think that the City of Philadelphia or other major cities in the U.S. are impacted by the trade war?
Kevin: Well here’s the problem. When you’ve got a city that’s making contracts with manufacturing firms abroad to produce the goods that they need—whether it is those posts they are going to put on the road, whether it is the steal or aluminum they’re going to use to manufacture goods for the city to make a new monument or bus station—those types of contracts are long-term contracts, so the city probably entered into that contract a year ago or more, and those contracts are set at certain prices. They had expected, put a certain budget behind that, and that’s what they wanted to pay. Those tariffs have suddenly jacked up the price by, as you said, 20%, 25%, on a lot of goods we use to make other things.
So it might not have been the actual product that China was manufacturing but a component to it. That’s pretty common. When those components get more expensive, then we can’t stay within our budget to get those goods produced here at homes, and the city is going to feel that just like firms that manufacture goods in Philadelphia. We have a ton of manufacturing of steel and aluminum products in Philadelphia and the greater Pennsylvania area. Those prices of those inputs have gone up to such a degree that it becomes almost unproductive, or cost loss, for a lot of those firms to produce goods anymore. Your bicycle, for example, Tiffany, I imagine it was probably made of aluminum or maybe it’s got some steel components, if you were to go out to the market today and try to purchase a new bicycle, you would see that the price has gone up by 20 or 25% because of this.
It is not so much that we’re feeling this in the form of direct goods. Most of what we import from China, for example, is not a finished product, it’s a component of a product, and then we make it here, or we make it in Canada, or Mexico, and then we either sell it to domestic consumers or we export it. So, we’re shooting ourselves in the foot to some extent by raising the cost of the ingredients for our manufacturing.
Now I’ll add to that, there is one area where you might see direct cost increases, and that is in the form of textiles and shoes. Your footwear, I don’t know if you like shopping for footwear, but if you do, you’re going to see some real pain when you look at those prices because the prices are going up by about 20 to 25% in footwear, and we import about 70% of our footwear from China. Most of it is made over there.
Host: And so it’s actually made there? So it’s not even just the plastic for your shoe or…?
Kevin: No. You can actually take a look at the story of New Balance, which is a firm here in the U.S. that initially supported tariffs, keeping certain Chinese products out, but once those tariffs starting touching on footwear products, the components that were going into their own footwear, they suddenly become advocates to get rid of the tariffs. So this is something that we often don’t recognize in the global supply chain, is that we do produce a lot of great finished products here in the U.S., but most of the components for those products don’t come free here. They come from somewhere abroad, usually China. That’s where we’re going to feel it.
Host: Yeah, I think in regards to the bike lane, it was aluminum steel and LED light components that were going to be on the posts or surrounding the posts, and it raised the cost to about – it raised the cost by like $40,000, so they had to shut down the project.
Kevin: Now, to be fair, that’s not just China. The steel and aluminum tariffs are worldwide. The textiles, the footwear, the other goods that I’m talking about, those are just China, but the steel and aluminum tariffs apply to every single exporter, and they are making it very difficult for us to produce anything that uses those metals.
Host: So how is the trade war being resolved?
Kevin: It’s not. To be perfectly fair, the rhetoric on both sides is accelerating. I believe that China is taking a much more diplomatic approach to trying to resolve the trade war. Their response has always been retaliatory. They don’t shoot first. They wait for the U.S. to take action and then they immediately respond with a countermeasure. So it has been the U.S. that’s been pushing this rhetoric to the brink of true disaster, and China has been responding at every turn.
So what’s going to happen in my opinion, and what’s already starting to happen, is that firms, U.S. firms operating in China are going to look for other places to go. So the U.S. trade deficit with China, for example, has declined, however, the U.S. trade deficit with Vietnam has increased. So our deficit with worldwide exporters is the exact same that it was before this war started, but it’s shifting to other countries. And that’s telling us that our firms are leaving China and setting up operations elsewhere. That’s very expensive for them, they’re taking a lot of losses in doing so.
China, however, is also becoming less dependent on the U.S. China is one of the largest importers of our soybeans, of our pork, a lot of U.S. finished products, and because of this trade war, China has shifted to other places. For example, now, China imports their soybeans from Brazil. So they are probably going to continue to do that, and that means that even if we washed away all the rhetoric, got rid of these tariffs, we’re not going to go back to how it was two years ago.
The damage is already done, supply chains have already begun to shift, and I think it will be a different world. There was a trade deal entered into early this year called the phase one U.S.-China trade deal that the administration has touted as the first step in reaching an armistice in this war. But to be clear, that trade deal only affected a very small amount of goods. So it cut – we had put tariffs on about $300 billion worth of Chinese goods. It took a small portion of those and cut that tariff in half, 7.5%. But overall, it’s only reduced the overall tariff by 1.5%, which is nothing in the grand scheme of things. And China has promised to import more goods from us, but they’ve put no plan of action in place or how they are going to do so. So right now, I’m very hesitant to say that this trade war is ending anytime soon.
Host: That’s great that you covered phase one, I was going to ask what do you think are the future phases and would China need to put some type of action into place for future phases of the trade agreement to come into fruition?
Kevin: China would have to actually start importing more of our agriculture which is really the hardest-hit area and we are feeling that here in Pennsylvania as well. We have a lot of farmers who are suffering because they can’t get their goods onto the Chinese market. The Trump administration has been bailing out our farmers with direct cash payments but that has slowed down as well. And I think in light of the current pandemic it’s very possible those payments will cease completely. That’s going to kill a lot of our agriculture.
What really will drive a change here I think is strong enough push from our business community. We are hearing from manufacturers, we are hearing from farmers that they do not want this trade war to go on. It has not achieved its goal, it’s not helping them get any more market access and it’s really pushing especially the small firms to the brink of bankruptcy. I am concerned about this because we have heard these voices growing in the manufacturing community especially asking the administration to cancel the tariffs especially because of the pandemic it’s a double whammy for many of them and the administration has very clearly refused they have said there is no talk in broad tariff reduction. The pandemic that is happening should be treated as a separate matter from the trade war. The trade war is going to keep going.
Host: That’s interesting. I do want to ask about the pandemic but before I do that, I have one other question. Let’s talk about how this impacts consumers a little bit more. What impacts can the average consumer expect to feel in their daily lives as the trade dispute continues? And basically, what I’m asking, Kevin, is when am I going to get my bike lanes?
Kevin: You might not get it for a little while, Tiffany. Unfortunately, this is the government we are talking about. Even regardless of the trade war, they drag their feet on some of these projects. No matter how beneficial they are. They are going to take some time. I think consumers are a little bit saved by the fact that the prices that they’re seeing going up are largely being borne by the retailers and the manufacturers who don’t want to lose their competitive edge. So, a lot of the taxes are being passed along to consumers in broad categories like textiles and footwear where there’s not a whole lot of domestic competition.
But where there are domestic producers manufacturing grocery products for instance. A lot of the retailers and manufacturers are going to hold back on passing the tariffs along to the consumer. They don’t want you to see too much change at the checkout. But you will start to see that increase as it becomes more difficult for these firms to maintain their stability in the current economic environment. So, long term in terms of bike lanes and in terms of large infrastructure projects. I think what you’re going to see happen is we’re going to shift sources of supply. That’s going to be 8 months, 10 months down the road before we find new sources of supply for those things.
Short term, consumers are going to see prices start to go up in domestic products, especially electronic domestic products—we’re talking about microwaves, washing machines. If you’re planning to buy any appliances, those are going to start to dramatically increase in cost because of the steel and aluminum tariffs. China is really going to be focused more on textiles, the footwear, grocery products.
We’re not buying food directly from China, but we’re buying a lot of the packaging a lot of the ingredients that go into different products, the plastics. For example, your Coca-Cola, of course, the cost of tin cans, aluminum cans that’s going to increase the cost for you at the end of the day.
This really is hurting small firms the most, Tiffany. This is the unfortunate side of things. The large multinationals have the resources to shift supply chains relatively easily and a lot of them already have done so. Small firms are the ones that don’t have the flexibility, the adaptability. If I’m a small firm of 300 400 people with a plant in China, I can’t just pick that up and move that to Vietnam or Indonesia. That’s not something that those firms are trained to do, they don’t have the experience in doing so the contacts. As anyone in global business will tell you, it takes more than a smile and a handshake to set up a manufacturing operation overseas. So those firms are suffering the most.
What can they do in this economic climate is that they can go to our government and ask for help—and I don’t mean help in the form of money, but all of these tariffs allow for exceptions. So if any small firm that feels it’s unfair for them to pay these high tariffs they can ask the government for an exception and many are doing that. They are using trade associations, they are using law firms to advocate on their behalf. Again, if you’re really small you might not have the resources for even that, and that’s going to be painful. But this is one avenue that firms have to try to get some relief in this time of increasing conflict.
Hpst: Are we already feeling the full impact of this trade war or are we only beginning to feel the impact of it?
Kevin: I’d say we have passed the very beginning, but we are in the early stages of the effects of this trade war. The aluminum and steel tariffs have been in place for almost 2 years now, so we got some experience with those. It’s the China issue that we are only going to feel a little bit later. A lot of the folks that we import from overseas we had planned to import from long ago. Shipments were already put in place, cargo was already packaged up in containers ready to come over here. And so the tariffs haven’t necessarily stopped or slowed down production for a lot of things out there, but they are starting to.
We are starting to see manufacturing slow down because of the trade war as well as because of the pandemic and as it slows down as costs are starting to go up we are to start to feel the pressure here at home. The good news here, Tiffany, I’ll tell you this last bit, the good news is that domestically we produce a lot of goods ourselves. The United States is a very diverse economy. We have a history of manufacturing, we have broad agriculture production, we’re very efficient so closing the door to Chinese imports does not mean closing the door to access. What it means is we’re going to pay more for it.
Host: How does the trade war impact jobs domestically or how will the trade war impact jobs domestically?
Kevin: One of the goals of the trade war was to increase jobs to decrease unemployment in the U.S. especially in manufacturing and the steel industry. And to some extent it did. We did see a bump in the number of steel jobs. Steel is producing at 80% capacity right now, higher than it’s been in years. Unemployment before the pandemic was quite low and that was a good thing. However, long term effects of the trade war mean that we are not going to be able to afford the products that we are producing domestically. And if we can’t pay for them, then our manufacturers aren’t going to be able to sustain themselves or sustain high levels of employment.
So long term, you are going to see a reduction, in my opinion, we are going to a reduction in manufacturing employment and that’s not necessarily a bad thing. It requires effective government policy. We are a country that has moved in many ways beyond manufacturing into high tech into services and innovative industries that require fewer people but more educated people. We need to find government policies that will help to retrain our laboring economy into high skill jobs. We need to be focusing on getting them the skills training that they need to be a part of the modern global economy. That’s the way to maintain a strong labor market.
Host: Is there an opportunity to fund other markets for our goods?
Kevin: This is the problem with exporting. When you have a juicy target like China with a billion people that is becoming closer to a middle-income country, then everything else seems like seconds. And so we have exported historically to Europe, but Europe produces many of the same things that we do and they don’t necessarily prefer American products over European. We have exported quite a bit to other parts of South Asia but their economies are much smaller and much less developed. And we have exported quite a bit to Latin America but, because of a variety of reasons—corruption, weaker economic environments—we haven’t been very successful in accessing many of those markets.Africa,also relatively poor, so we haven’t really seen a lot there. When we are selling finished goods or selling high tech products, we are selling pharmaceuticals, we’re selling technology, those require a market that can afford those goods and really the best market out there for those goods is China. And that is the market, we are closing the door to.
Host: So, I saved this question until the end, but I think it’s worth asking. How is the trade war impacted by the COVID-19 pandemic?
Kevin: It’s a great question, obviously very timely. The trade war is probably coming into a stark contrast right now with the COVID-19 pandemic and it’s showing us how bad this really is. One of the things that we should understand is that we import a lot of healthcare products, a lot of medical supplies from China. Whether it’s surgical masks, gloves, to respirators, and other equipment. A lot of those goods are manufactured in China, and if they are not manufactured in China, the plastics and the components of those goods are made in China.
The trade war included tariffs on those goods and so for the past year and a half or so we have reduced the number of those goods that come into the United States, and that may have created a shortage in those goods when we need them the most. So there is a real concern that the trade war has had the direct impact of limiting access to goods we need to fight the pandemic.
Now in response, there has been a lot of pressure on the Trump administration to get rid of those tariffs and allow those medical goods to come in. And so they have taken steps, just recently to adjust tariffs on certain medical goods, not all of the ones we need, but a certain segment of those exports. So we’re moving in that direction but what I really think our audience needs to know here, Tiffany, is that the trade war is not always felt by consumers until we really need the things we are blocking like during the pandemic. And we are seeing that day by day here.
Host: I have heard in the media people say things like “we have a supply problem.” Is that what they are referencing?
Kevin: With respect to medical supplies and healthcare supplies, yes, that’s definitely what they are referencing. With respect to other types of goods, I think we can probably hold off on buying a new pair of shoes and we can domestically produce our toilet paper and purell sanitizer for the foreseeable future. But yes, the supply problem is that we can’t get the things we need that China has been producing efficiently for years. And we’ve effectively blocked those exports.
Host: Kevin, I don’t want to ask you to look into your crystal ball and predict the future because that’s not fair but I am sort of curious. Do you anticipate a silver lining or at least a way that we might change how we trade as a result of COVID-19?
Kevin: The silver lining for me, Tiffany, is the awareness that this is all creating. I think that academics like me who have worked in the trade sector for many years are absolutely shocked by the lack of understanding amongst our politicians, amongst are leaders, as to the interconnectedness of the global economy—because to me, it’s very obvious it’s been this way for some time. But I think to the average citizen, we don’t think necessarily about where our goods come from. We assume that they are just going to show up on our store shelves or in our grocery stores without much trouble. Not realizing, all the components, all the mechanisms that it took to get those goods there. And I think this trade war and the pandemic are helping us to realize more and more each day the importance of global trade and of protecting and preserving the global trade system.
Host: I would like to thank Kevin for joining me and for sharing his expertise on the trade war and the complex relationship between the U.S. and China. Globalization is a boon and a curse and we are experiencing both sides first hand. When the trade war started you may not have thought the products on the long list of new tariffs would affect you. It’s not like many of us are buying raw aluminum or plastics, but now you know. When the U.S. raised tariffs on Chinese goods, it made the components of the products we buy, the ingredients for everything, our washing machines to our cars more expensive. And Americans are paying that price. Our local government, our manufacturing industry, and yes even our shoes and clothing budgets. The COVID-19 pandemic has only intensified the impact because the U.S. urgently needs life-saving healthcare equipment from China.
Let’s hope we can begin to resolve this dispute for the sake of the greater good.
Catalyst is a podcast from Temple University’s Fox School of Business. Visit us on the web at fox.temple.edu/catalyst. We are produced by Eva Terra, Megan Alt, Anna Batt, and Stephen Orbanek with help from Karen Naylor. Special thanks to Joe Williams at Temple University’s Tech Center.
I hope you join us next time until then, I’m Tiffany Sumner and this is Catalyst.
COVID-19 and Your Finances
Steve Casper, PhD ’10 and associate professor of finance, and Dennis Martin, DBA ’18 and CFO of a division of the U.S. Department of Agriculture, shed light on all parts of the complicated financial situation associated with COVID-19.