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New Tariffs Having a Significant Economic Impact

More than $100 billion in new U.S. tariffs on Chinese imports took effect on September 1, 2019, impacting many consumer goods including apparel, footwear, consumer electronics and food.

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More than $100 billion in new U.S. tariffs on Chinese imports took effect on September 1, 2019, impacting many consumer goods including apparel, footwear, consumer electronics and food.

More than $100 billion in new U.S. tariffs on Chinese imports took effect on September 1, 2019, impacting many consumer goods including apparel, footwear, consumer electronics and food. Additionally, $200 billion are poised to come online in December, which will result in nearly every good imported from China to be taxed by the U.S. government at a rate of 15%.

What’s more, tariffs will also be raised on October 1 to 30%, up from 25%, on an existing round of tariffs already in effect on $250 billion in Chinese goods. As a result, approximately $550 billion worth of total goods will be paid for by companies in the United States that import them.

President Trump announced the new tariffs in mid-August this year, after China raised duties on $75 billion in U.S. goods amidst an intensifying trade war between the two countries. Many of the tariffs put in place by China impact U.S. agricultural products, putting a strain on American farmers, as well as manufacturers and distributors that supply the farmers. For instance, Deere & Co. announced that they are cutting production of tractors by 20% in the second half of 2019. 

The impact of prior tariffs, as well as new tariffs, have already filtered into the U.S. economy. The U.S. Gross Domestic Product (GDP) grew at an annual rate of 2.1% in the second quarter of 2019, which is slower than the 3.1% reported for the first quarter of 2019. The U.S. Bureau of Economic Analysis indicated that the deceleration was attributed to tariffs and a global economic slowdown.

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The nonmanufacturing index (NMI) decreased 1.4 percentage points in July 2019, to 53.7%, its lowest score since August 2016. NMI measures the strength of the services sector and is based on data compiled from purchasing and supply executives nationwide. Respondents indicated ongoing concerns related to tariffs and employment resources as reasons for the decline in the NMI.

The Institute for Supply Management (ISM) purchasing managers index (PMI) report for August 2019 showed the manufacturing sector, which accounts for about 12% of the U.S. economy, contracting for the first time in 3½ years, with the export component hitting a 10-year low. Again, the implementation of tariffs is identified as the main culprit for the decline in the manufacturing sector.

A recent Goldman Sachs survey found companies are “rerouting supply chains and relocating production to mitigate exposure to the trade war.” U.S. companies are cutting costs, putting off investments and paying extra to build up inventory to help mitigate the impact of China tariffs. According to a report by Deutsche Bank, some companies are postponing decisions like building factories.

The Consumer Confidence Index dropped in July 2019 to its lowest level since January, with a third of respondents citing the latest proposed round of U.S. tariffs on China as a concern. The U.S. economy is roughly 70% driven by consumers. The sharply higher tariffs on Chinese goods are set to raise prices for consumers on everything from phones and video consoles to apparel and shoes.

The ISM published its “Semiannual Economic Forecast” in May 2019. When asked about whether tariffs had raised the price of goods to their customers, 59.1% of respondent indicated “yes” and 40.9% responded “no.” Price hikes were the most frequent in wholesale trades, retail trades, agriculture and construction. These segments of the economy are likely to be feeling the impact of tariffs.

While industrial manufacturers, distributors and retailers incur higher costs, ultimately it is the consumers that pay as costs get passed down along the supply chain.

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