Abu Dhabi, UAEFriday 20 September 2019

US consumers likely to feel the squeeze as China tariffs take effect

Consumer sentiment in the US is at its lowest since 2012, according to the University of Michigan

The taxes are likely to be passed onto end users in the US, the IMF warned in May. Bloomberg
The taxes are likely to be passed onto end users in the US, the IMF warned in May. Bloomberg

The US began the latest wave of escalation in its tariff war with Beijing on Sunday, taxing a range of mainly consumer goods from China at a rate of 15 per cent, with the impact likely to be most acutely felt by consumers.

Products that impact the average US consumer such as livestock, spices, vegetables, flowers, cheese, ceramics, steel and alloys are among an extensive list of items set to be taxed under the first wave of tariffs on $300 billion worth of Chinese goods.

In an unprecedented move, the US also said it would forgo a grace period for cargoes of tariffed goods that are already on their way to the US as Washington looks to target China on alleged infringement of intellectual property rights by twisting its arm on trade.

The move is not unusual for the administration of President Donald Trump, which last year slapped a 25 per cent tariff - now 30 per cent - on $200bn worth of Chinese goods and which has come down hard on telecoms manufacturers such as Huawei, accusing it of carrying out surveillance for the Chinese state, charges the company vehemently denies.

China has responded by placing tariffs on $75bn on US imports, including crude oil, which led the US to add a further 5 per levy to its current round of tariffs. The tariffs mark a complete turnaround of US policy towards trade.

A 1997 note from the US Treasury’s Office of International Affairs argued for lower barriers to trade pointing out that trade as a share of economic activity actually fell when barriers rose sharply after World War I.

"Trade as a share of economic activity only recently returned to the levels experienced 100 years ago because of the reduction of trade barriers after World War II,” the department said as it advocated for fast track agreements with Latin America and Asia to lower tariffs and encourage more exports.

However, the current US administration's approach to trade, which has already weakened demand growth for commodities such as crude and fuelled fears of a recession, is likely to squeeze US consumers.

The US administration, wary of criticism from American consumers, deferred full implementation of its proposed tariffs last month, with a second tranche set to be effective from December 15 - a move Mr Trump said was made to avoid hurting US consumers during the Christmas shopping season.

Consumer sentiment within the US is already flagging over fears of being pushed off a “fiscal cliff” on the back of rising taxes and lower public spending, according to a study by the University of Michigan.

A consumer sentiment index tracked by the university found August registered the steepest monthly decline of 9.8 points since 2012.

"The data indicate that the erosion of consumer confidence due to tariff policies is now well under way,” said Richard Curtin, chief economist at the university’s survey research centre.

"Compared with those who did not reference tariffs, consumers who made spontaneous negative references to tariffs also voiced higher year-ahead inflation expectations,” he added.

The International Monetary Fund has also warned about the impact on end users in the US and China as the biggest fallout from the escalating tariff war.

"Consumers in the US and China are unequivocally the losers from trade tensions,” the International Monetary Fund said in May.

"Some of these tariffs have been passed on to US consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins,” it added.

The multilateral lender warned that if further increases in tariffs were imposed, a domino effect is likely, with prices for imported goods passed on to consumers and domestic competitors also increasing prices.

Updated: September 1, 2019 04:10 PM

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