Since President Donald Trump began to announce current and future tariffs on trading partners, China has begun to retaliate with tariffs of its own and has even gradually stopped taking some U.S. exports, such as grains and meats.
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The trade war with China is likely to have a direct impact on consumers in the U.S. and around the world, given that the U.S. imports around 16.5% of the nation’s total imports from China.
An expert explained how Trump’s trade war with China could affect the average consumer’s finances.
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Rising Costs on a Variety of Goods
American consumers are already feeling the impacts of this trade war in rising product costs, according to Babak Hafezi, an adjunct professor of international business at American University. Numerous sites known for their super low prices like Shein, which manufactures products in China, have announced big price hikes.
Indeed, according to economists, U.S. consumers could experience a 15% to 30% markup on products from China.
The pain of increased costs could likely start small — an extra $8 here, $12 there — but it could snowball.
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Delays and Quality Decline
What may come next are “potential delays or even shortages of certain goods” because other countries may not be able to produce “identical replacements or match the volume previously sourced from China,” Hafezi said.
As production shifts to different regions, consumers may also see changes in product quality, which prompt consumers to reconsider their usual brand preferences.
One possible benefit of this is that it allows new or lesser-known brands, so-called “challenger products,” to enter the market and capture consumer interest, he said.
A Risk of Stagflation
The current path of trade wars is pushing the U.S. toward “stagflation, a troubling mix of sluggish economic growth paired with rising and continuous inflation,” Hafezi warned.
In such a scenario, the Federal Reserve may feel compelled to raise interest rates even further to cool inflation, but that would come at a cost.
“Higher rates would slow economic activity, drive up the cost of borrowing, and place added pressure on interest-sensitive sectors like housing, real estate development and auto purchases,” Hafezi added.
At the same time, consumers would see their purchasing power shrink, leading to reduced consumer spending and more slowing of economic growth.
Retirees could also be squeezed by both a decrease in the value of their portfolios, a decrease in the value of hard assets, such as a home, and be pushed into a longer timeframe to close on a sale.
Long-Term Ripple Effects
If tensions persist and there is no clear resolution or roadmap on tariffs, Hafezi said it’s likely that U.S. consumers will see “long-lasting effects ripple through the economy.”
Building new manufacturing capacity (especially in alternative countries) requires stability and predictability, and so far, he said, “we’ve had little of either.”
Production will eventually begin to shift to more “geopolitically aligned nations,” he said, at which point prices may come down from their recent peaks, but Americans shouldn’t expect the low costs they’ve grown used to from China-based manufacturing.
The Silver Lining
There is a silver lining if the pressure forces domestic production. More local manufacturing means more jobs and slightly shorter lead times.
You shouldn’t necessarily expect cheaper goods though, as U.S. production is not low-cost.
Steps You Should Take
One of the most effective ways to navigate such periods is by holding assets that tend to move with inflation, Hafezi said. “Assets like gold, commodities or inflation-indexed securities can serve as a hedge, preserving value when purchasing power declines.”
This becomes especially important if there are significant swings in inflation, as these assets can help cushion the impact and provide a measure of financial stability, he explained.
Additionally, families can buy bigger purchases sooner than needed if they know they will be needed. By doing so, you can lock in better prices before tariffs really hit hard. This can include things like appliances, tires and power tools.
It’s also a great time to build an emergency savings buffer.
Prepare For an Economic Correction
Without well-structured and executed trade agreements, Hafezi said that U.S. consumers “should be prepared for a deeper economic correction than we’ve experienced.”
He hopes that the U.S. will step back from an “overly adversarial approach” that treats all trading partners as potential threats. “This kind of posture doesn’t strengthen our position but rather backfires, ultimately hurting the American consumer through higher prices and reduced access to goods.”
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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Sources
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Babak Hafezi, American University
This article originally appeared on GOBankingRates.com: US vs. China: Here’s How Trump’s Trade War Could Affect Your Finances
