President Trump has taken us into a global trade war.
He thinks he can win the war, but he is wrong. The best we can hope for is that he figures this out quickly, limiting the economic damage. I’m increasingly worried that he won’t.
The most recent salvo in the trade war is Trump’s decision to impose a 25 percent tariff on $50 billion of various Chinese imports to the United States. The Chinese immediately followed with in-kind tariffs on U.S. exports to China. This follows tariffs earlier in the year on Chinese imports of steel, aluminum, washers, and solar panels, and retaliatory hikes by the Chinese on an array of U.S. agricultural and manufactured goods.
The European Union, Canada, Mexico, and other U.S. trading partners have also been hit with the steel and aluminum tariffs, as has Canadian lumber. Our partners have responded with their own tariff increases on a growing list of U.S. products. So far, in total, about $100 billion worth of imports to the U.S. and an in-kind dollar amount of U.S. exports have been slapped with higher tariffs.
If this is the extent of the tariff increases, then although not good for the economy, the economy will be able to shrug it off. Pumping up growth, at least for a while, are large deficit-financed tax cuts and increases in federal government spending.
Tariffs hurt the economy through higher prices for imported goods. For example, the price of laundry equipment to U.S. consumers has jumped 18 percent since this past spring, when tariffs were imposed on Chinese imports. Higher tariffs act much like a tax increase, weakening the purchasing power of households; if households need to spend more on imported goods, they have less income to spend on other things.
U.S. exports also suffer as our trading partners purchase what they need more cheaply from our competitors, and the higher tariffs weigh on the profitability of U.S. multinationals and thus their expansion plans and stock prices. The stock market has gone sideways in recent months, likely due in no small part to Trump’s mounting attacks on our trading partners.
The uncertainty the trade war creates also hampers businesses, particularly those reliant on the global supply chain. They are less likely to make a significant investment decision until there is clarity around the tariffs. It is misplaced to think that since it will be costlier to produce overseas and export to the U.S., the higher tariffs will prompt global companies to invest more in the U.S. The problem is that these multinationals have no idea how long the tariffs will remain in place.
Trump has entered into a trade war in an effort to get China to respect the intellectual property of U.S. companies and to more fully open its markets. The president also appears fixated on reducing the size of the U.S. trade deficit. While getting China to play by the rules is a laudable goal, focusing on the trade deficit makes little economic sense, and both goals are unlikely to be achieved, at least not soon.
It is increasingly difficult to see U.S. trading partners backing down and purchasing more U.S. goods and services, and it is unclear how they would do this. Given Trump’s claim that he is imposing the higher tariffs largely on national security grounds, which is clearly not the case for our allies, they appear offended and thus not inclined.
While it would take a lot to derail the currently strong economy, an across-the-board hike in tariffs on U.S.-China trade could do it. The U.S.-China trading relationship is the largest in the world, with Chinese imports to the U.S. running at more than $520 billion per year — more than one-fifth of total U.S. imports. U.S. exports to China total more than $130 billion — close to one-tenth of total U.S. exports.
Indeed, a U.S. recession seems all but certain if there were as much as a 25 percent tariff on all U.S.-China trade, something candidate Trump promised during the presidential campaign. The resulting increase in import prices and decline in exports would overwhelm the U.S. economy, particularly since the entire global economy and financial markets would also be reeling. This scenario is one of mutually assured global economic destruction, costing the U.S. millions of jobs and tens of millions in the rest of the world.
The prevailing wisdom has been that Trump is a businessman, and that his chest thumping over trade is simply part of a negotiating strategy to improve the U.S. terms of trade. If the strategy didn’t work, and it hurt the U.S. economy, he would quickly pull back and move on to other distractions.
But while this still seems like the most likely scenario, the recent round of tit-for-tat tariff increases and the deterioration in Trump’s relationship with many of our traditional allies mean other scenarios now need to be considered. With so many global personalities and politics involved, the brinkmanship can take on a life of its own, and the possibility of a no-holds-barred trade war and recession can’t be dismissed.