How China's Retaliatory Tariffs May Impact The U.S. Economy

Aug 23, 2019
Originally published on August 23, 2019 9:19 am
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NOEL KING, HOST:

It has been a busy morning for economic news. China announced it will impose tariffs on $75 billion of U.S. goods. The Chinese government says it's doing this to retaliate for the Trump administration's recent decision to put more tariffs on things that the U.S. imports from China.

Now also this morning, Federal Reserve chief Jerome Powell said the central bank will, quote, "act as appropriate" to sustain the economic expansion in this country. NPR's Jim Zarroli is on the line to help us suss some of this out Hey, Jim.

JIM ZARROLI, BYLINE: Hi, Noel.

KING: OK, first, let's go to this news from China. What are they doing with tariffs, and who's going to be affected?

ZARROLI: Well, China says it will begin imposing tariffs in two stages. Some are going to take effect next month, some on December 15, which exactly mirrors the calendar that the U.S. has announced for placing its tariffs on Chinese products, so clearly this is an effort to match what the U.S. has done.

The tariffs from China will be on a lot of different products that come from the U.S. They include autos and auto parts, electrical components and soybeans. Once again, you're seeing U.S. farmers bearing a lot of the cost of this trade war.

KING: The tariffs will be placed - the Chinese tariffs - will be placed on $75 billion worth of U.S. products. So give us a sense, Jim, of what that means for the U.S. economy.

ZARROLI: Well, it's not huge. I mean, we have a $20 trillion economy. It also needs to be pointed out that, you know, there's often less to China's tariffs than meets the eye. I spoke with Chad Bown at the Peterson Institute for International Economics, and he says, you know, often in the past, China will say it's imposing tariffs. But then when you really drill down on the numbers, they're smaller than China said.

KING: Oh, that's really interesting. Why would China say it's imposing tariffs on U.S. goods and then not do it, or not do it to the extent that they're saying they're going to?

ZARROLI: Well, the Chinese government is under a lot of political pressure because of President Trump making threats against China. And I think China wants to show that it can't be pushed around. But it also knows that when it imposes these tariffs on products like soybeans and cars, it hurts - it makes them more expensive, and it hurts Chinese consumers. So it's trying to minimize the impact on ordinary Chinese.

One of the other ways it's doing that interestingly is by lowering tariffs on imports from other countries. In other words, you know, we'll raise the tariffs on cars made in the U.S. but then lower them on cars made in Japan or Korea so overall car prices don't go up. And if this keeps up because - it's a problem for the U.S. car industry because it means it potentially will lose part of the Chinese market.

KING: Well, when you say it's a problem, spin that out a little bit. What are these tariffs going to mean for the U.S. auto industry as a whole?

ZARROLI: Well, a lot of the American cars that are sold in China like GM - I mean, if you go to China, you American cars like GM on the roads - they're actually made over there, so they weren't presumably be affected by the tariffs. But the U.S. does sell about $14 billion worth of autos and auto parts to China. So if GM brings parts into China to use in, you know, the assembly of cars over there, they might be affected.

Also there are some cars that are made in the U.S. that are then sold in China directly. For instance, about a third of the BMW SUVs that are made in Spartanburg, S.C. go directly into the Chinese market.

KING: Wow.

ZARROLI: And BMW has already begun moving some of the production of those SUV to other places like South Africa to try to evade the tariffs.

KING: Let's turn to this big meeting of central bankers and Fed chiefs in Jackson Hole, Wyo. Earlier this morning, I talked to Neel Kashkari. He's with the Minneapolis Fed. He's there in Jackson Hole, and I asked him about these reports we've seen, you know, indicators - key economic indicators pointing to a potential recession on the horizon. Here's what he said.

(SOUNDBITE OF ARCHIVED NPR BROADCAST)

NEEL KASHKARI: Well, it's very hard to predict a recession, but the single best predictor we have over the past 50 years is this nuanced thing called the yield curve, where Treasury government bonds, longer-term bonds have a lower interest rate and shorter-term bonds.

You know, if you - if any of your listeners buy a Treasury bond, you're lending money to the U.S. government. And if you're going to tie up your money for 10 years, typically you want a higher interest rate than if you tied it up for one year.

Well, this quirk has happened now where long rates are lower than short rates. That's been a very good predictor of recessions historically, and it signals that investors are nervous about the future. That has now happened, and so I take that signal seriously. And it's a reflection of worries about downside risk in the U.S. economy.

KING: All right, so the Federal Reserve chair Jerome Powell talked today. Everyone was kind of anxious and eager to see what he was going to say. Did he talk about any of this?

ZARROLI: Yeah, I mean, he said we will act as appropriate to sustain the economic expansion, which seems like he's opening the - leaving the door open for another rate cut, which the markets like to hear. He also - he says the U.S. is in a favorable place, but it faces certain risks. They are growth slowing and trade uncertainty.

He seemed to take this very subtle dig at Trump. He said while monetary policy is a powerful tool to support consumer spending and business investment, it cannot provide a settled rulebook for international trade. And Trump responded with another attack on Powell right away. He said, my only question is who is our bigger enemy - Jay Powell or Chairman Xi, you know, China's president.

KING: My goodness, wow.

ZARROLI: Pretty strong.

KING: NPR's Jim Zarroli. Jim, thanks so much.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.