DAVID GREENE, HOST:
China, this morning, has taken the action that we were expecting. It has announced it will raise tariffs on about $60 billion of U.S. imports. This will include about 5,000 products. This, of course, follows President Trump's decision to impose tariffs on $200 billion worth of goods from China. So who pays for this back-and-forth? Well, Magi Raible runs a California company that makes backpacks and luggage out of recycled materials. It's called LiteGear. Her company's bags are made in China, so she now has to pay more to import them. And as these tariffs have climbed, Raible called off plans to expand her company. And instead, she's begun to shrink it.
MAGI RAIBLE: I cut back on my marketing budget. I cut back on my own income, laid a couple of people off.
GREENE: She says without some relief, her small company might not make it past August.
RAIBLE: We do need to find a better solution between the two countries and get some balance in there and protection for the intellectual property. But crushing small companies and costing jobs over here just doesn't seem the right approach.
GREENE: OK. That's the voice of one American and her experience with the trade war.
It does not appear that there is a solution between the two countries imminently. And let's talk about that with David Wessel. He is the director of the Hutchins Center at the Brookings Institution and frequently comes on our program to talk about economic issues. David, welcome back.
DAVID WESSEL: Thank you, and good morning.
GREENE: So what is the latest from China? What are these new tariffs? Or what are these increased tariffs, it sounds like?
WESSEL: Right. Initially, the Chinese said they weren't going to be pushed around by President Trump after he increased tariffs last week. And then this morning, they - the other shoe fell. They have imposed - they had previously imposed tariffs on some U.S. goods. They increased them. There's now three - four categories of tariff China's imposing - 25% on some, 20% on others, 10% on others and 5% on others. The list they put out was in Chinese, and I'm afraid I couldn't decipher it...
GREENE: Understood.
WESSEL: ...Just yet. But it looks like the 25% tariffs are very focused on agricultural products. That's what they have done. They have tried to punish the farmers, knowing that we export a lot to China. One interesting thing is these tariffs don't take effect until June 1, which does give the two sides some maneuvering room to settle this.
So we don't really know where this is going, but it's not going in the right direction. And I think that's why we saw the initial stock market reaction in the U.S. so negative. Stocks fell a lot. I think markets had been hoping President Xi and President Trump could work this out. At the moment, it doesn't seem like we're going in that direction.
GREENE: So I know markets can go up and down. But I mean, initially seeing the markets really dip after the announcement from China is a sign that investors are really worried that this trade war is going to keep going.
WESSEL: Right. And it will hurt the profits of big U.S. companies, some of which depend on global supply chains to China or will hurt the firms that buy parts from China or retailers who sell Chinese imports. I think that one - this dialectic is always kind of interesting because we know that President Trump watches the stock market carefully. And so perhaps if the market plunges, he'll turn soft - a little softer in his rhetoric towards China. I don't know.
GREENE: Well, that's interesting because, I mean, President Trump has imposed tariffs not just on China but on multiple countries. He has said he loves tariffs. And he's also said they make money for the United States. Is that accurate?
WESSEL: Not really. You know, what was really interesting - over the weekend, Larry Kudlow, the president's economic adviser, said what most economists believe - that it's not a free lunch here. So look. Tariffs are a tax on the goods and parts we import from China. The president is right that the Treasury is collecting billions of dollars from tariffs. But the question is - who pays that tax? Who pays for those tariffs? That varies from market to market. And in some cases, the Chinese may absorb some of the pain, or exchange mates may adjust to compensate for it.
But all the available evidence suggests that, ultimately, the bulk of the tariffs are being paid by Americans, either American companies that import stuff and are getting smaller profits or American consumers that'll have to pay more. And the president says, this is great; you know, American producers will produce more of this stuff that we buy from China. Well that might be true in areas where we actually still make stuff that we import from China. But the domestic producers then will raise their prices. So this is a tax increase on Americans, and there's no other way to describe it.
GREENE: Well - and we heard the voice of that one business owner in California. I mean, if it's hurting some Americans - if the response from China has the potential to hurt big U.S. businesses, I mean, is there a point where the political pressure builds so much on the Trump administration that they have to take it into account?
WESSEL: Well, perhaps. But remember; trade is only a part of our U.S. economy, and the U.S. economy is doing pretty well. And these price increases have been relatively isolated. That's why the inflation rate is still pretty low; it's below the 2% target that the Fed has set.
So I think there are a couple of ways in which this plays out. One is people will begin to think - businesses will begin to think that the president and China are not going to be able to come to a new agreement and the whole global trading system and all the roles that we've put in place since World War II are unraveling. I think that'll shake business confidence and lead people to invest last, and I think that's why people are so worried about this.
And I think, also, that businesses are going to begin to change their plans as a result of this. Maybe they'll make less in China and more in Mexico. That's good for Mexico. But for American workers, I don't see it makes any difference. So I think it's a pretty tense moment.
And what's interesting here is it all boils down to basically two men - Donald Trump and President Xi in China. They have to decide when the brinksmanship starts. Neither one of them wants to lose faith - face. Each one of them thinks the other guy is in a weaker position, and that's where we are.
GREENE: David Wessel directs the Hutchins Center at the Brookings Institution. David, thanks so much.
WESSEL: You're so welcome. Transcript provided by NPR, Copyright NPR.