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President Donald Trump tweeted on Sunday that by the end of the week, he's going to raise tariffs from 10% to 25% on $200 billion of Chinese goods if no trade deal is reached.

U.S. consumers are paying for this trade war

By Daniel Ikenson

With negotiations to remove sweeping U.S. tariffs and end the year-long trade war seemingly in the homestretch, President Donald Trump abruptly reversed course on Sunday and announced his intention to increase those tariffs and extend their application to all imports from China by the end of the week.

The president believes that depriving Chinese exporters of access to the U.S. market will compel Beijing to accept U.S. demands. Although raising tariffs certainly will tighten the vise, the squeeze will be felt most acutely by Americans because tariffs are nothing more than taxes on U.S. consumers, producers and investors.

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Contrary to Trump's simplistic portrayal of trade, the United States doesn’t purchase goods from China. Trade is not conducted between countries. Rather, trade is the culmination of billions of daily transactions between individuals around the world seeking to obtain the most value from that exchange — the biggest bang for their buck. By raising costs, tariffs ensure that consumers get less bang for their bucks.

Rather than get on an airplane to China to purchase goods from a local vendor, we avoid those transaction costs by letting our retailers do the heavy lifting. U.S. companies such as Walmart, Home Depot and Amazon purchase goods from Chinese manufacturers.

Those purchases are made not because the retailers have any interest in consuming those goods but because U.S. individuals — and U.S. companies requiring intermediate goods and machines to produce their own output — demand these goods. By virtue of the volume of their transactions, wholesalers and retailers have the market power and the logistics infrastructure in place to negotiate prices and purchase these products on our behalf.

When tariffs (or duties) are imposed at the U.S. border, those costs get factored into the prices paid for each transaction in the supply chain and, ultimately, by box store customers like you and me. China is not paying those tariffs. And trade wars are neither good nor easy to win.

In 2017, before the onset of the trade war, U.S. importers purchased $504 billion of goods from China and paid tariffs (or duties) of $13.5 billion to U.S. Customs and Border Protection — about 2.7%.

Last July, tariffs of 25% were imposed on approximately $50 billion of imports from China, and in September, tariffs of 10% were imposed on an additional $200 billion of Chinese goods.

Year-end figures show that in 2018, U.S. importers purchased $543 billion of goods from China and paid duties of $23 billion — 4.2%. That nearly $10 billion increase in tariffs paid came out of the wallets of American consumers.

If the president follows through with his plan to hit all imports from China with 25% tariffs, Americans should expect to have to absorb a consumption tax bill in the neighborhood of $100 billion — 10 times greater than they had to swallow this year, if their consumption patterns were similar.

Trump likes to remind audiences that he signed into law a tax bill last year that significantly reduced taxes, which he argues gives American households more spending power. His trade war is almost certain to wipe out the benefits of his much ballyhooed tax reform.

Daniel Ikenson is director of the Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies. You can follow him on Twitter: @dikenson.

What others are saying

Stephen K. Bannon, The Washington Post: "The goal of the radical cadre running China — the Chinese Communist Party — is to be the global hegemonic power. The president’s threatened tariffs on Sunday demonstrate the severity of this threat. But as Washington and Beijing wrap up months of negotiations on a trade deal this month, whatever emerges won’t be a trade deal. It will be a temporary truce in a years-long economic and strategic war with China."

Gregory Daco, The Hill: "A trade deal in which China promises to import more agricultural products, works toward a stable currency and reinforces intellectual property rights protection remains a possibility. However, I don’t foresee a significant rollback of existing tariffs, and I see underlying tensions regarding China’s strategic ambitions, its industrial policy, technological transfers and 'verification and enforcement' mechanisms remaining in place."

Michael Pillsbury, The Wall Street Journal: "It's hardly surprising that the long-negotiated deal appears to be falling apart. China has been busy in these final three weeks trying to weaken the deal. That's Beijing's modus operandi: String the West along, then renegotiate and take back earlier concessions from the gullible 'barbarians.' Trump should be applauded for demanding that China go straight. Regarding tariffs, the long-term goal should be total elimination, but the president was right to promise an increase in response to China’s bad-faith negotiation. A tough U.S. policy is necessary to prepare a better defense against Chinese economic aggression."

What our readers are saying

Same story over and over with President Donald Trump and his Munchausen syndrome. Create a crisis, then pretend like you're a great hero for resolving it. Unfortunately, Trump declares himself a hero without ever resolving anything. He does manufacture problems, though, so I guess you could say he's good at something.

— Sam Nada

China, like almost any country, is only going to respond to force, which in this case is tariffs. Given a choice, China will always decide to run over the USA.

—@jdm35758

It should be quite obvious to anyone, with at least a high school education, that the tariffs are no more than a price-fixing scheme by the billionaire class. We need to get Trump out before he ultimately bankrupts us all.

— Richard K. Price

China is still trying to get a unfair advantage in trade with the USA. When it stops this behavior, the trade war stops.

—@Whaturthinking3

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