Trade war has already added 5% to typical U.S. shopping basket

As the U.S. trade war with China expands, American consumers already are feeling the sting and it stands to get worse.

Virtually all economists agree that retail price increases by national players such as Minnesota-based Target Corp. and Best Buy will quickly follow if President Donald Trump acts on threats to apply new tariffs to $300 billion worth of Chinese imports.

Last week, Trump dropped some products from his latest tariff list "based on health, safety, national security and other factors." He delayed imposition of 10% tariffs on other products from Sept. 1 to Dec. 15. The move was meant to offer temporary relief to worried stock market investors and businesses that depend on Christmas shoppers for their livelihood. But the stock market crashed anyway based on signs of recession in the bond market and concern over the trade war.

Analysis from financial consultants Gordon Haskett Research Advisors shows cost increases already have taken hold in a typical shopping basket of 76 regular items from Target and Walmart. Target's shopping basket cost roughly 5% more in June than it did in October 2018, Gordon Haskett said.

Despite the president repeatedly saying that the Chinese are paying the protective tariffs imposed by his administration, "the money is coming from Americans, not the Chinese," said Robert Kudrle, an international trade specialist at the University of Minnesota. "Essentially, the president is pitting Americans against each other."

At Creative Lighting in St. Paul, Michael Minsberg tried to absorb the first round of tariffs, which he said created havoc with his budget. When the White House began adding more taxes to Chinese imports, which make up 90 to 95% of lighting fixtures sold in the U.S., Minsberg said he had no choice but to pass along his price increases to customers.

The White House did not respond to a request for comment. It has said the president's trade policies will eventually create jobs and boost U.S. manufacturing. The administration also thinks tariffs are the best way to curb unfair Chinese trade practices and intellectual property theft.

Republicans such as Florida Sen. Marco Rubio agree. "Yes, the trade dispute with #China will cause economic pain, but so too will returning to the status quo. And Surrendering to China will cause long term & permanent economic devastation," Rubio has tweeted.

Trump has cast farmers hit by retaliatory tariffs as victims of the trade war who must be subsidized. He rarely mentions American businesses paying 10% to 25% in new import taxes or consumers who have had to absorb those taxes.

Trump's latest announcement of Chinese tariffs provoked a Chinese moratorium on the purchase of U.S. agricultural products. The president has promised more farm subsidies. But Minnesota farmers want a trade deal negotiated with China, not another government bailout funded by other U.S. business sectors and their customers, said soybean and hog producer Kristin Duncanson.

Duncanson, a former president of the Minnesota Soybean Growers Association and a board member of the Minnesota AgriGrowth Council, farms near Mankato. She said government relief has saved many farmers facing depressed commodity prices, bad weather and retaliatory tariffs. But she does not think more subsidies paid for by Americans is the answer.

"We don't want to pit one part of the economy against another," she said. Pitting farmers against consumers, she added, is "very unsettling."

A study by three economists from the New York Federal Reserve and Columbia and Princeton universities concluded that "the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born by the consumers of imports." By the end of 2018, the trade war had reduced "U.S. real income by $1.4 billion per month," they added.

In their study, "The Impact of the 2018 Trade War on U.S. Prices and Welfare," Mary Amiti of the New York Federal Reserve, Stephen Redding of Princeton and David Weinstein of Columbia determined that tariffs had "an almost immediate effect on prices in the U.S. economy."

A tariff Trump placed on foreign-made washing machines left prices "rising sharply" in an appliance sector where costs "had been falling steadily for years."

The biggest hits came when the White House targeted Chinese imports to push its "buy American, hire American" agenda and to punish the world's second-largest economy for unfair trade practices and theft of U.S. intellectual property. Yet protective tariffs meant to hurt the Chinese "typically" raised import costs to U.S. businesses by 10% to 30%, Amiti, Redding and Weinstein found. Because those prices tracked with the size of the tariffs (10 to 25%), the researchers concluded that "much of the tariffs were passed on to U.S. importers and consumers."

The researchers also said the trade war's costs "are quite large relative to optimistic estimates of any gains that are likely to be achieved."

In the broader economy, Amiti, Redding and Weinstein found that every job saved by protective tariffs cost $195,000, four times the annual wage of a steelworker.

They also said tariffs raised the average cost of manufacturing in the U.S. by 1%.

China's decision to suspend purchases of U.S. agricultural products will make matters worse for many U.S. businesses and consumers, economists say. For instance, the moratorium means America's livestock industry will not benefit from a massive market vacuum in China created by African swine flu, said Iowa State agricultural economist Dermot Hayes. Instead of going to Minnesota pork producers, that windfall will now go to Europe, Hayes predicted.

For the president to say otherwise "is complete bunk," said Gary Hufbauer, an economist with the nonpartisan Peterson Institute for International Economics.

Yet Trump told a group of U.S. business people gathered at the White House July 15 to celebrate "Made in America Day" that "we've taken in tens of billions of dollars in tariffs from China." He made the statement as he promised to use $16 billion to subsidize farmers who lost sales when China taxed U.S. soybeans and pork to retaliate.

Subsidizing farmers wounded by Chinese retaliation to the newly announced tariffs could cost an additional $16 billion on top of the $16 billion already earmarked, Hufbauer predicted.

Steve Billet, a former AT&T lobbyist now teaching in George Washington University's business school, said the president is subsidizing farmers to lock in his political base.

At Creative Lighting, Minsberg said he is worried long-term tariff-driven price increases "will boomerang back to me" in the form of lost customers.

Scott MacDonald's company, Mac & Mac, receives and distributes imports sold to several major Minnesota businesses. The Minnetonka company pays shipping, tariffs and delivery costs.

"It galls me when [the president] says how much money [the country] is making," MacDonald said. "I'm losing money. I'm not going under, but I'm losing money."

For example, MacDonald said, Menards canceled 6,000 units from a 25,000-unit order to offset a 25% tariff on a product.

Amiti, Redding and Weinstein said that in 2018 "at least $136 billion of trade was redirected as a result of import tariffs." "This," they added, "potentially could imply very large costs for U.S. multinationals (and Chinese exporters) who have made irreversible investments in China." Major Minnesota corporations such as Medtronic and Cargill have significant investments in China.

The researchers did not account for the new Chinese moratorium on U.S. agriculture purchases. Also unmeasured is the impact of China's decision last week to devalue its currency. Devaluation can lower prices of Chinese exports and temper Trump's latest tariff threat.

The latest turns in the trade war are "very bad news for the world economy," Kudrle said. And they are not good news for Americans, even farmers.

On July 15, Trump told the White House crowd that he has not "had one farmer say, 'Please make a fast deal, sir. Please make a fast deal.' "

In Minnesota, Duncanson now hears a different story in discussions and on social media.

More subsidies "are not what we're hoping for," she said. "We're hoping for a negotiated settlement."

Jim Spencer • 202-662-7432