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Why Talk of a Trade War Is Overblown

As world leaders gather at the G20 summit in Hamburg, Germany this week, experts warn of a possible trade war–but some suggest something more akin to a squabble.

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BY Zoe Henry - 07 Jul 2017

PHOTO CREDIT: Getty Images

As world leaders gather this week to discuss the future of international trade, you may be wondering what, if anything, this has to do with you. In a nutshell, a lot--that is, of course, if you sell goods internationally or manufacture outside the U.S.

As the G20 Summit gets underway--gathering heads of state from more than twenty major economies in Hamburg, Germany--analysts warn that mounting tensions may lead to an all-out trade war, particularly between the U.S. and China. Although the two nations recently reached a new trade agreement, sources suggest that President Trump could raise tariffs on imports of steel and aluminum as early as this month.

The worst case scenario? If the new tariffs come to pass, U.S. trading partners could well retaliate: China may move to institute its own tariffs, or limit dealings with U.S. companies, for example. Some are even suggesting the measures could lead to an all out trade war.

"We are gearing up for some tariffs against China, with the possibility of a trade war," noted Ian Bremmer, the president of the political consulting firm Eurasia Group, in a recent interview with CNBC.

Downsides of higher tariffs

Should Trump move to increase tariffs on select imports, in the short term, it could become costlier for some U.S. businesses that use Chinese steel. Should matters escalate, other inputs could see price surges.

That's got Cody DeLong nervous. The co-founder of the Portland, Maine-based concert ticket seller Sound Rink, is concerned that some of his costs could spike. In addition to ticket sales, the business, which generated $5 million in 2016 revenue, sells items such as lanyards and flags, which are assembled in China. "We would have to reevaluate some of our prices, and then the hassle of going overseas may not be worth it," he told Inc.

The move could similarly impact companies that do business in China. Fred Crosetto, the founder and CEO of Ammex--a disposable glove distributor based in Kent, Washington--says that China accounts for roughly a quarter of his company's $110 million in sales. He's worried that higher tariffs could lead China to target individual companies like his, or elect to work with competitors from other countries.

The upsides

Still, others suggest that there could be benefits to increasing tariffs. "The cost will be passed through in the economy in the form of higher prices," says Robert Scott, a senior economist with the left-leaning Economic Policy Institute. "You'll put people back to work, which will create jobs." He notes that in his view, the long-term solution to solving the U.S. trade deficit would be to reduce the value of the dollar against foreign currencies. He adds that instituting tariffs may be a more symbolic move on the part of the administration, which could fail to recoup a significant amount of money in the long-term.

Indeed, many expect that the effects of new tariffs would be minimal. "Undoubtedly, prices would rise somewhat, but they have recently fallen, so maybe part
of this recent decline will be reversed," notes Dean Baker, the co-director of the non-partisan Center for Economic and Policy Research. "That is hardly a crisis."