How New Tariffs and A Trade War Could Affect You
Last week, President Trump announced his plan to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. These tariffs would be applied to all foreign countries equally, although Trump has suggested exemptions for Canada and Mexico if they come to agreement on a new NAFTA deal.
It’s been a few years since the U.S. had any significant tariffs in place. What could be the potential impacts of this new move?
How Do Tariffs Impact Prices?
Tariffs on steel and aluminum will cause increased costs for products made with those imported materials such as cars and cans.
If a car manufacturer has been using imported steel to build its cars, their costs will rise regardless of whether they continue using imported steel or switch to American-made steel. This additional cost is typically passed onto the consumer in the form of higher retail prices.
An article published on Quartz says (emphasis ours):
The idea that interest rates could rise faster due to a steel tariff may not seem logical on the surface. But tariffs do increase prices, which could be reflected in the inflation numbers. And if the Federal Reserve sees inflation rising, they could react by increasing interest rates faster.
But experts are less concerned with increased prices than they are with what could potentially turn into a trade war in which other countries levy tariffs on U.S. exports. This is possibly why Paul Ryan expressed his concerns, saying through his spokeswoman AshLee Strong:
So if tariffs cause a general increase in prices…
What Happens During a Trade War?
During a trade war, other countries react to tariffs by imposing tariffs of their own. For example, the European Union has already suggested that they will retaliate by imposing tariffs on Harley-Davidson motorcycles and Kentucky bourbon.
As you can imagine, this retaliatory behavior could quickly escalate into a situation where countries trade blows with each other as they seek to inflict maximum economic damage on each other. Alvaro Vargas Llosa writes:
If we are truly at the beginning of a trade war, then we could see increased prices on consumer products across the board. Worse, it could even lead to product shortages if American manufacturing facilities can’t fill the gaps left by diminished imports.
But Are There Any Benefits to a Trade War?
Most experts seem to agree that the new tariffs on steel and aluminum could have far-reaching negative consequences. As F. McGuire writes on NewsMax:
Inflation combined with a decline in economic activity would not be good for American consumers. And higher interest rates would make a bad situation worse. But there may be a silver lining for gold investors. Commodity Trade Mantra reports (emphasis ours):
The economic uncertainty and potential effects of tariffs and trade wars could have a negative impact on your wealth, but ultimately be favorable for physical precious metals like gold.
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