President Trump has been engaging in a trade war with China, threatening other countries and enacting new tariffs. WPSU’s Anne Danahy spoke with Terrence Guay, a professor of international business at Penn State and an expert in tariffs. He’s also director of the Center for Global Business Studies in the Smeal College of Business.
Here's their conversation.
Anne Danahy
Hi, Dr. Guay, thank you so much for talking with us.
Terrence Guay
Hi Anne, glad to be here.
Anne Danahy
President Trump has imposed a new 10% tariff on Chinese goods, and he's threatened 25% import taxes on goods from Canada and Mexico, although that's on hold right now. How do these taxes and tariffs work, and what do they mean for a typical person in Pennsylvania?
Terrence Guay
Well, tariffs are basically a tax on imported goods. So when a good comes in from China, there is now an additional 10% tax on that which typically gets passed on to consumers who buy those goods. In some cases, companies might accept the additional cost of the tariff that would reduce their profits, but most companies aren't going to be willing to do that. They want to pass on much of those additional costs to consumers, who ultimately, when we go to the grocery store or to the car lot to buy a car, will be facing higher prices.
Anne Danahy
So it could affect both the business people. Maybe their profits aren't going to be as high if they're selling new cars or washing machines, but it could also affect the consumer that they notice the price tag goes up.
Terrence Guay
Yes, exactly. So in the case of the tariffs on steel and aluminum products, President Trump has announced that effective in March, there will be a 25% tax on all imported steel. That's going to affect all kinds of products, from cars that we might want to go to a car lot to buy, and that's going to raise the prices of those. It's also going to impact everything, like canned goods. So if you buy soup, if you buy beer, if you buy soda pop, it's going to be more expensive because of the additional aluminum tariff that's going to be added on to those costs.
Anne Danahy
On the other side of that, could it be good news for U.S. steel companies?
Terrence Guay
Oh, definitely. It'll be good news for U.S. steel companies. Right now, the U.S. gets about 75% of its steel from U.S. steel companies, and about 25% is imported. So with this additional tariff, which raises the cost of the price of imported steel by 25% it does give cushion to American steel companies to be able to either increase their market share further, or to raise their prices.
Anne Danahy
Historically, what's the justification behind tariffs?
Terrence Guay
Often, tariffs are used to punish a country that is seen as competing unfairly. So if a country may not be allowing U.S. goods into their country, it might be appropriate to impose a tariff to try to retaliate, and so-called level the playing field, that's historically been the approach to tariffs. And then countries will often reach an agreement. They'll negotiate and often will reduce those tariffs. In some cases, countries will create trade agreements like the United States, Mexico, Canada, formerly NAFTA trade agreement, as a way to try to reduce tariffs as well. What President Trump seems to be doing is to be imposing tariffs for a whole range of reasons, with respect to Canada and Mexico, for immigration, for drugs like fentanyl crossing the border, and tariffs seem to be his tool of choice to pressure countries to do what he would like them to do.
Anne Danahy
Are there other ways that tariffs can impact the economy? Kind of the law of unintended consequences.
Terrence Guay
Sure, it can lead to companies changing the way that they do things. So for example, U.S. companies, I think, in President Trump's mind would, instead of importing goods from other parts of the world, that they might make more of them in the United States. It's not clear that that happened during his first administration. In fact, most of the studies that have been done have shown that there were job losses, because while some companies gain, part of trade is that some companies and some workers gain, some are going to lose because of the lack of competitiveness. When the increased costs of those goods get passed on to other companies, they may have to lay off workers. So to go back to our car example, or appliance makers who use steel, it's going to become more expensive for them to get the raw materials to make their products. They will probably sell less of them and probably have to lay off some workers. So while the steel industry may gain, other industries are likely to lose workers.
Anne Danahy
In general then, historically, are tariffs ineffective or effective, or does it just depend?
Terrence Guay
Well, it really depends. During most of our history of the United States, we had pretty high tariffs from our founding until the end of World War II, our tariffs were very, very high. It wasn't until we became the world's most competitive producer after World War II that all of a sudden we said we want low tariffs, and that's generally been our philosophy for the last 80 years or so so this new approach of using tariffs to try to address global economic problems is a little unusual from the U.S.'s historical perspective.
Anne Danahy
Are there other approaches, or other ways that might be as effective or more effective for dealing with trade deficits and trying to have a stronger economic base here at home.
Terrence Guay
Well, there's a couple of ways of thinking about trade deficits. It's not necessarily a bad thing to have a trade deficit. I mean, a big part of what drives it is that Americans like to buy things, and Americans consume a large portion of what drives the U.S. economy. And to the extent that that means Americans want to buy more goods and cheaper goods, companies are going to respond by finding ways to lower their costs, and if that means building factories and making products abroad so that Americans can import them, we're driving the trade deficits ourselves. It's not really other countries that are doing it. They're certainly taking advantage of encouraging companies to go there. But at the end of the end of the day, it's Americans who want to buy things and want to buy cheaper goods, and if that means labor is going to be cheaper and other costs are going to be cheaper abroad, it makes goods cheaper for us, but it may mean fewer jobs in some industries than we might otherwise have.
Anne Danahy
Do you have any thoughts or an opinion about where this could lead if President Trump, in fact, does continue with these tariffs, and it turns out to be more than a threat overall, the impact on the economy.
Terrence Guay
Well, other countries have already said they're going to retaliate. The Europeans are preparing a list of goods that they would impose tariffs on once the tariffs on steel come into place. One of the things that we have to think about is, what's the best way to build friends around the world for a whole range of purposes. And maybe we want to identify a handful of countries that maybe aren't playing by the trade rules that we support. A lot of people say that China is a country that is not competing fairly. So to me, it seems to make more sense to get other countries to work with us, to put pressure on China, rather than just lashing out and punishing every country that we feel might not be competing completely fairly.
Anne Danahy
Right, because now China is saying it's going to impose tariffs on, or new tariffs on U.S. goods, it's raising those, including oil and farm equipment, and so that could hurt farm machinery manufacturers?
Terrence Guay
Yes, and farmers in particular. During President Trump's first administration, when we imposed tariffs on China over a series of months, China retaliated, and much of that was imposed on agricultural exports from the United States, and a lot of farmers in the Midwest were hurt by that. And what happened is a lot of farmers in Argentina and Brazil found markets in China that they didn't have previously. So now it's up to American farmers to try to replace the Brazilians and the Argentinians that had made inroads into the Chinese market. So it's another example of the unintended consequences,
Anne Danahy
Right, so many ripple effects that you can't necessarily forecast. Well, Terence Guay, thank you so much for talking with us.
Terrence Guay
Thank you, Anne, I really enjoyed it.
