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Oct 1, 2018 2018-10 Faculty Finance

‘We all lose’ in trade war, says Gies Business professor

Trade tensions between the United States and China continue to increase, as the two world leaders slapped each other with another round of tariffs this week. The long-term effects have yet to be determined, but a Gies College of Business financial expert expects those effects will be detrimental.

“There’s going to be significant costs to bear,” said Don Fullerton, Gutgsell Professor of Finance at Gies College of Business. “A lot of economists were arguing strongly against a trade war because in the long run we all lose.”

10.1 Fullerton Trade War

Fullerton, who has taught at Illinois since 2008, is also an economic policy expert at the University of Illinois Institute of Government and Public Affairs. He says it’s possible that previous trade negotiators didn’t get a good enough deal for the U.S., which is what President Trump is claiming, but Fullerton cautions that even if a better deal were to be negotiated, those gains would be negated by the short-term losses.

The U.S. announced it is imposing new 10 percent tariffs on $200 billion of Chinese goods. Those products include industrial machinery parts, food seasonings, network routers, and more. China responded with new tariffs of 5–10 percent on U.S. goods totaling $60 billion dollars. Those include meat, chemicals, and clothes. President Trump’s tariffs on China now cover about $250 billion of goods, or about half the amount the country sells to the United States. In turn, U.S. companies now pay tariffs on about $110 billion on goods being exported to China.

“There are gains from trade, so shutting down trade means that both sides will lose,” said Fullerton. “It hurts consumer welfare. We’ll end up paying more for all kinds of goods. We’ll pay more for domestically-produced goods because we don’t get to buy the cheap imports anymore. And the goods we do import, we’ll pay more for because of the tariffs.”

This trade fight may not be over anytime soon. The latest round of tariffs on Chinese goods is set to increase from 10–25 percent at the end of the year. Walmart, the largest retailer in the U.S., has warned it will pass rising costs on to consumers. The company wrote a letter to the U.S. Trade Representative on September 6 saying it could be forced to raise prices on a wide range of products from shampoo to food. The net impact on consumers, Fullerton argues, will be hard to gauge.

“Some of (the price changes) will happen quickly, but we won’t know all of the many considerations that went into determination of those prices,” said Fullerton. “There are so many other bumps and fluctuations in the background: changes in the price of oil purchased from Saudi Arabia, a workers’ strike in one industry or the other, and even the weather in Iowa affecting crop prices. As a result, it will be hard to tell how much of the price increase is specifically due to tariffs.”