May was a rough month for free trade advocates and investors.
President Trump raised the tariff rate to 25% on $200 billion worth of nearly 6,000 imported Chinese goods, bringing the total to $250 billion of Chinese imports at that rate. Then in a surprise move, the president reignited the trade conflict with Mexico via tweet, saying the U.S. would impose 5% tariffs on all Mexican imports starting June 10.
Those tariffs would increase by 5 percentage points monthly, until they reach 25% on Oct. 1, unless Mexico helped to slow down the flow of Central American migrants through the country and into the U.S. The U.S. imports automobiles, fruits, vegetables and liquor from Mexico, and about 5 million U.S. jobs depend on trade with the nation.
With the recent renewed trade/tariff talk, it’s time to answer five frequently asked questions.
1. Who pays for tariffs? When foreign goods arrive in the U.S., domestic importers pay the tariffs. Some firms choose to absorb the cost and make less money, while others pass along the increase to consumers. Economists have found that the cost of tariffs has mostly fallen on the U.S. companies and households, not on the foreign companies.
2. How much are these tariffs going to cost me? Last year, nearly $69 billion, according to the National Bureau of Economic Research, and the increase on Chinese goods will likely tack on an average of $500 to $1,000 for consumers this year. The Mexican tariffs could add to the pain, especially for the automotive industry.
The U.S. imported $93 billion in autos and parts from Mexico last year and as a result, “No vehicle assembled in the United States is 100 percent U.S.-made,” according to the Center for Automotive Research. Analysts believe that Mexican tariffs could add an average of $1,500 to the cost of a new car or truck.
3. Are tariffs good for U.S. producers? NBER estimates that U.S. producers enjoyed gains of $61 billion, because they were able to charge higher prices. But it wasn’t just U.S.-based brands. A separate study on the impact of duties on washing machines found that prices increased for foreign and domestic manufacturers.
Additionally, most brands hiked dryer prices, despite the fact that no tariffs were imposed on them. All told, U.S. consumers spent $86 more for each washing machine and $92 for each dryer last year.
4. Could tariffs impact U.S. growth? Economists estimate that if the current tariffs remain in place for the year, it would shave 0.3 — 0.5% from U.S. GDP. That means instead of 2.5% growth in 2019, the annual pace could drop to 2%. The Chamber of Commerce conducted an analysis projecting that Mexican tariffs “would result in a potential tax increase on American businesses and consumers of $17 billion. Furthermore, that number would eclipse $86 billion should the tariffs reach the president’s threatened cap of 25 percent.”
5. How are investors reacting to tariffs? U.S. stocks closed down more than 6.5 percent in May, their worst monthly performance since December. In early June, Fed Chairman Jerome Powell said the central bank was keeping an eye on trade developments, their impact on the U.S. economy, and would “act as appropriate to sustain the expansion.”