What are tariffs and how would a U.S.-China trade war affect Utah’s economy?

The trade games between China, the United States and other world powers have begun.

The U.S. imposed tariffs on certain imported goods from China, Canada, Mexico and the European Union starting at midnight July 6.

One policy adviser compared the games to a staring contest between two children, with the U.S. betting that China will blink first.

Utah Republican Rep. Robert Spendlove, who is also senior economist for Zions Bank, said the implications of the tariffs from both sides could mean a lot for local economies.

“It’s really easy to get into a trade war, it’s really tough to get out of one,” Spendlove said.

Here’s a breakdown of what tariffs are and what they might mean for consumers and producers.

What are tariffs and what do they do?

At its most basic definition, a tariff is a tax on a product or commodity coming from another country.

Right now, the U.S. has imposed a tax hike on certain imported goods, including aluminum and steel. A total of 818 goods from China are subject to the tariff, according to Business Insider.

Additionally, the Trump administration has imposed a 25 percent tariff on steel imports from the European Union, Canada and Mexico, as well as a 10 percent tariff on aluminum from those countries, according to the Washington Post.

Tariffs don’t really affect the demand for certain goods, but they do affect the supply, Spendlove said. With a tax hike on imported goods, the market can’t offer as much of the products affected, which forces higher prices.

On exported goods, demand decreases and prices are lower, Spendlove said.

How are prices of goods determined?

The free market determines prices of goods and commodities by considering supply and demand, Spendlove said. You can see the prices of goods by looking at various websites, including CNN and CNBC.

In an ideal free market economy, supply and demand would be the only factors in determining prices, but it doesn’t really work that way, Spendlove said. Tariffs, taxes and other things can factor into pricing.

Right now, some of the local Utah exported products that are being affected by tariffs from other nations include aluminum, copper, corn and hogs, according to Spendlove. Prices for all those items are down.

For goods imported to Utah, prices for lumber are up, as are prices for consumer staples, such as food and household items.

Increased lumber prices may make an already expensive housing market even more pricey, as it will cost more to build homes, Spendlove said.

The danger that some economists see is that the impact of the tariffs could be more widespread in the future, Spendlove said. As much as 33 percent of U.S. goods could be affected by the trade war, he said.

“The biggest fear … is that the small impact we’ve seen could be exacerbated to a large degree in the future,” he said.

How could tariffs affect the Utah economy?

The World Trade Center Utah predicts that retaliatory tariffs from China on U.S. goods will have “diverse and harmful effects” for the Utah economy, especially for producers of aluminum, beef, plastics and agriculture.

Utah’s wheat farmers could also see adverse effects, as prices are forced down to compensate for exported wheat that is threatened by tariffs, according to WTC Utah. Transportation equipment producers also could see demand decrease for their products domestically.

Spendlove predicts that a trade war could affect GDP by as much as 1 percent. Inflation could also go up, which would force the Federal Reserve to increase interest rates.

That, in turn, could lead to what economists call a “yield curve,” which historically has led to recessions, according to Spendlove.

“We have a real threat of going into a recession because of the trade war,” he said.

What’s the point of tariffs or a trade war?

There is a trade deficit between China and the U.S., and the Trump administration has a valid concern about it, Spendlove said.

“The Trump administration is absolutely correct that countries in Europe and China have been taking advantage of us,” he said.

China has stolen some intellectual property from Americans to try to get ahead in the world market, according to Spendlove. Some North Atlantic Treaty Organization allies aren’t pulling their own weight in funding the organization. Those are two reasons for the Trump tariffs, among others.

But some economists fear that the trade wars could do more harm than good, prompting overreactions by other countries that could cause even more problems, Spendlove said.

The U.S. should be pressing for more trade equity in the world market, but should be using relationships with allies to do so, he added.

“We’ve got to find a way to start balancing things out a little bit better,” Spendlove said. “I would recommend it’s a little better to try to be working with (other countries) than aggressively going after them the way it has been the last few months.”

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