You've probably seen headlines or heard chatter about trade wars after the U.S. placed tariffs on products imported from China, Canada, and Europe. Earlier this month, the White House put tariffs on $34 billion worth of Chinese goods, and China immediately responded with their own tariffs on an estimated 1300 American products.
So far, the Trump Administration has placed tariffs on products imported from China, Canada, and Europe, including steel, aluminum, lumber, and cars. And that might just be the start; the President has promised another $200 billion of tariffs on Chinese goods that could hit as early as this fall and threatened 20% across-the-board tariffs on imported automobiles and auto parts, something The Wall Street Journal said "has little precedent in modern U.S. policy."
Update: In late July, President Trump announced plans to offer $12 billion in aid to help farmers impacted by trade disputes. The move is aimed to help farmers hit by the ongoing trade war as several countries have announced retaliatory tariffs on soybeans, pork, beef, sorghum, rice, and a range of fruits and other agricultural products.
"This is obviously a short-term solution that will give President Trump time to work on a long-term trade policy and deal to benefit agriculture as well as all sectors of the American economy," Agriculture Secretary Sonny Perdue said during a call with the media on July 24.
Perdue said that farmers have suffered as a result of "illegal" retaliatory tariffs from China, Canada, Mexico, the European Union, and other major economies.
Trade Wars: "Don't Blame Trump"
The aid comes after President Trump's trip to Europe for the summit with leaders of the Group of 7; many member nations -- the seven largest advanced economies in the world -- are upset the U.S. imposed tariffs on steel and aluminum imports from countries including Canada, France, Germany, Italy, Japan, and the U.K. Ahead of that trip, Larry Kudlow, the National Economic Council director, stated that the President should not be held responsible for mounting trade conflicts with American allies.
"Don't blame Trump," Kudlow told reporters in the White House briefing room. "Blame the nations that have broken away from fair trade practices. [The global trade system] is broken and President Trump is trying to fix it. And that's the key point."
Meanwhile, a coalition of 65 organizations across a wide range of industries—including retailers, manufacturers, farmers and technology companies—have joined together to oppose the tariffs on China. "Imposing tariffs on Chinese imports will not have the effect that the administration desires," the group, led by the National Retail Federation, wrote in comments submitted to U.S. Trade Representative Robert Lighthizer. "The tit-for-tat tariffs have now landed us in a trade war that is starting to do real harm to U.S. businesses, workers, farmers and consumers."
Trade Wars: Consumers Will Feel the Pinch
Here is what you need to know now about the possible fallout on your finances from the tariffs and a potential trade war, which could lead to job losses and market upheaval. The U.S. stock market has fared well this month, but the "ebullience is unlikely to persist" if the trade war heats up further and starts to crimp the global economy, Standard Chartered's Steven Englander told Politico.
For example, any vehicles that are built overseas or in Canada and Mexico could end up costing a lot more if the carmakers add the expected new tariffs to the price tag. Here is a list how a trade war could impact the top-20 best selling cars in the U.S.:
What Does a Trade War Mean for You?
The bottom line is these tariffs may cost you a few extra bucks for certain items such as jeans, pet food, frozen chicken nuggets, whiskey, and possibly more in the future. Tariffs can lead to increased costs. For example, a 21% tariff last year on Canadian lumber was estimated to add an average of $1360 to the total cost of each new home built, according to Bloomberg.
Here is a partial list of some of the products that could see price increases over time as a result of the rising global trade tensions:
How Are Costs Passed on to Consumers?
Based on a 25% tariff on steel imports, if a car maker uses $600 worth of imported steel to make one vehicle, the tariff would translate to a $150 increase in material costs that can be passed on to the consumer in either higher prices or lower incentives (or both).
Economy Is Solid but Higher Interest Rates Loom
While the current economic picture is good, a trade war means "unintended consequences on consumers" according to Alex Capri, a senior fellow at the National University of Singapore Business School. Capri speculates the consumer price inflation rate would rise 1.5% in 2018, higher than previously estimated, and that consumers would feel the brunt of it.
At the same time, Federal Reserve Bank Chairman Jerome Powell says gradual interest rate hikes should continue as planned, with the low unemployment rate and higher inflation numbers supporting the case.
The Fed said they expect to raise rates four more times this year vs. the previously announced three times. One of the Fed's main objectives is to monitor inflation rates and adjust monetary policy as needed. The bank can increase interest rates if inflation gets too high in order to curb upward pressure on prices.
"The economy is doing very well. Most people who want to find jobs are finding them and unemployment and inflation are low." —Jerome Powell, Federal Reserve Chairman
Prepare to Spend More
Consumers should plan to spend more because interest rates will increase. You should also prepare for the scenario of higher inflation that results into even higher interest rates on credit cards, home equity line of credit (HELOCs), mortgages, and auto loans. All of which means you can expect to pay more on your monthly bills.
Credit card interest rates are tied to the Fed, so if the central bank increases rates by 2% over time that can impact your credit card's annual percentage rate (APR)—the average is currently at 16.49%. HELOCs are connected to Fed rate hikes too, and they could increase as well because of inflation.
Loans for cars and homes are not tied directly tied to the fed funds rate but they typically follow along accordingly. If a trade war breaks out and inflation rises, you could expect to see increases in auto and home loan rates and even additional costs.
How Will Tariffs Affect You?
If more tariffs are imposed by and on the U.S., then the likelihood of a trade war increases. That can make life more expensive down the road in a couple of ways:
- The price of consumer goods increases.
- The cost of borrowing money increases.
- Overall economic activity slows, which leading to job losses and potentially a recession (or worse).
Right now the goods affected are not common everyday items for many of us, but if that changes to include food or agriculture items, things could change quickly. For the holidays, it may mean the price of bigger ticket items—TV's, laptops—may cost more as well.
Establishing an emergency fund for unexpected expenses is a good idea no matter what happens with trade policy. Here is an article that explains the advantages of an emergency fund.