There has been a lot of media coverage speculating that the biggest loser in the ongoing U.S.-China trade war is the American consumer. Headlines screaming that not China but Americans are paying tariffs through higher prices are everywhere. Journalists speculate the tariffs are costing Americans upwards of $1,000 a year.
If those claims are true, there must be some evidence to support them, right? Yes, there are anecdotes about companies paying higher prices for some raw materials imported from China, and yes, there are interviews with select consumers saying they see the prices of imported goods they buy increasing. However, is that really proof that America, not China, is paying for the trade war? Not really.
Start by picking one of the amounts the media says the average U.S. consumer is paying in increased prices due to tariffs — about $1,000 per year.
That means that the average consumer will pay $1,000 more for their same piece of the GDP. Essentially, they get the same quantity of stuff but pay an extra grand for it. Another way to say this is the price of their same basket of goods increased by $1,000. That’s called inflation.
The current GDP in the United States is about $59,000 per capita, and a $1,000 increase on that amount is about 1.7 percent. Likewise, the current annual rate of inflation through August is also 1.7 percent. Now for a bit of logic: Does it make sense that all of the inflation for the year that consumers are seeing is exclusively due to paying tariffs on Chinese goods? In other words, do you think that if the Trump tariffs didn’t exist there would be zero inflation?
Another way to look at the purported Trump tariff effect on America is to examine U.S. businesses. Many use imported raw materials and components to domestically manufacture consumer goods, while others import finished goods from China for sale to consumers. If Americans were paying the tariffs as the media is reporting, wouldn’t we see increasing costs and prices in these businesses?
In fact we see exactly the opposite. In the durable goods market, the Producer Price Index for raw materials fell 0.7 percent in August — the fifth straight monthly decline. And in the non-durable goods market, raw material prices are down a full 8 percent over last year. Finally, looking to the finished goods area, prices across the entire spectrum, from imported furniture to electronics to clothing, are all down compared to last year before the tariffs even took effect.
Lastly, we’ve been repeatedly told that if prices are really declining — they are — then it must be because importers are absorbing the tariffs here in the U.S. when the goods arrive. Again, this is not true. The Trade Services Producer Price Index released by the Bureau of Labor Statistics measures the margin between what a wholesaler (importer) or retailer pays for goods and what they sell them for. Since last year, this index has improved by an astonishing 18 percent. Importers and retailers are earning higher margins on goods that are costing American consumers less.
But someone has to be paying the tariffs, right? They are, and it’s China — in two ways. First, to continue their manufacturing fervor, Chinese businesses are cutting their prices by as much as 25 percent to avoid losing export sales. Why 25 percent? This seems obvious, but that is the amount of the latest round of Trump tariffs on Chinese manufactured goods. China is paying the tariffs by receiving 25 percent less for the sale of their manufactured goods and raw materials.
Second, the effects of the trade war have depressed the Chinese economy dramatically and reduced the value of their currency. That means buying raw materials and finished goods from China costs Americans less regardless of manufacturer price reductions. And, when China spends their depressed currency on foreign goods it costs them more. How much more? A quick calculation shows it’s roughly the amount of the tariffs.
• Kevin Cochrane teaches business and economics at Colorado Mesa University, and is a Permanent Visiting Professor of Economics at The University of International Relations in Beijing.