Who's paying for the US-China trade war?

President Trump has long said it is China, not the US, who will pay for the ongoing trade war. But as tensions flare-up, it has become increasingly clear that much of the burden is falling on consumers stateside.

Of the $200bn worth of Chinese imports now subject to 25 per cent tariffs as of May 10, roughly 40 per cent of those products are consumer goods like furniture, electrical equipment and apparel, according to the USTR. Chinese officials have threatened another round of their own, which Cesar Rojas and Catherine Mann of Citi say will set in motion the US slapping tariffs on the remaining approximately $300bn of imports not yet subject to additional duties. As their chart shows, the majority of this will be felt in the consumer space, followed by capital goods and automobiles:

Some firms that import goods from China have absorbed the additional costs of the tariffs by lowering their profit margins. In fact, according to David Kostin at Goldman Sachs, margins have already come under pressure this year and last. And if 25 per cent tariffs are applied to all Chinese imports, his team reckons S&P 500 earnings-per-share estimates will decline by as much as 6 per cent in 2019.

Of course, firms could raise prices on their products to offset their costs. A 1 per cent increase in prices by S&P 500 companies in the aggregate would do it, says Kostin. As the IMF points out in a recent report, some have already decided to do so, making US consumers and their counterparts "unequivocally the losers from trade tensions:"

In a new report, the New York Fed puts a number on just how much it'll cost. According to estimates crunched by Mary Amiti, Stephen Redding and David Weinstein, the latest round of tariffs will cost the average American household $831 this year, or collectively $106bn annually. As the FT reported here, it's a combination of an added tax burden borne on importers, who have had to pay more for the same goods since China has not adjusted its prices, and "deadweight losses," which accumulate when firms switch to cheaper but less efficient producers to reduce their exposure to tariffed goods.

With 55 per cent of survey respondents telling Citi in a recent poll that they do not expect a trade deal (but also no additional tariffs), the pain felt by US consumers is unlikely to ease any time soon.

Of course, supporters of Trump's policy might argue that such costs are only intended to be temporary and that the switch to less efficient producers stateside is essential if innovation-based efficiency is to be stimulated in the long run (in contrast to the cheap labour-cost-based and dirty-fuel based efficiency that underpins Chinese competitiveness).

Related Links:
Why China doesn't want to breach its renminbi red line - FT Alphaville
A potential new snag in the US-China trade talks - FT Alphaville
What China wants: Brad Setser, and Freya Beamish - Alphachat