That Trump’s dangerous game of Trade War Chicken is punishing the U.S. economy was quantified in a new analysis from Moody’s Analytics last week. Far from “winning big time, against China,” Trump is bringing the pain to Americans, especially those who supported him. As Yahoo Finance reported:
Forecasting firm Moody’s Analytics estimates that Trump’s trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels absent the trade war. That’s a combination of jobs eliminated by firms struggling with tariffs and other elements of the trade war, and jobs that would have been created but haven’t because of reduced economic activity.
The firm’s chief economist, Mark Zandi, told Yahoo Finance that the job toll from the trade war will hit about 450,000 by the end of the year, if there’s no change in policy. By the end of 2020, the trade war will have killed 900,000 jobs, on its current course. The hardest-hit sectors are manufacturing, warehousing, distribution and retail.
Other data back up the Moody’s Analytics numbers. Employers have created 1.3 million jobs so far this year, down from 1.9 million during the same period in 2018. The manufacturing sector has actually contracted, with many producers struggling with higher prices caused by Trump’s tariffs. Business investment is growing by the smallest amount since late 2016.
To be sure, the tariffs on Chinese products—essentially a tax on American consumers now estimated by J.P. Morgan to cost families $1,000 a year—have been rising rapidly. The average tariff on Chinese goods was 3.1% before Donald Trump launched his trade war. That figure has skyrocketed to 21.2%, according to Chad Brown of the Petersen Institute for International Economics. And unless there is some resolution in the tit-for-tat tariff exchange with China soon, that tax will climb:
On Sept. 1, Trump imposed a 15% tariff for the first time on finished consumer goods imported from China, including clothing, shoes, appliances and food. A similar tariff is due to go into effect Dec. 15 on a deeper set of consumer goods, including electronics and smartphones. At that point, the average tariff would have risen to 24.3% and Trump would have hiked taxes on virtually everything imported from China.
(On Sept. 11, President Trump announced he would delay the imposition of new tariffs until Oct. 15 as a “gesture of good will” to China.)
As I noted last week, the warning signs popping up across the American economy are causing growing concern for Trump and his advisers.
The ISM Manufacturing Index dipped below 50 for the first time in three years, a level indicating contraction in manufacturing by America’s factories. The University of Michigan Consumer Sentiment Index plummeted, too, dropping by 8.6 points, its largest decline since the “Fiscal Cliff” crisis of December 2012. Exactly as predicted, the small bump from the GOP’s Tax Cuts and Jobs Act of 2017 has disappeared, even as that windfall for the wealthy is helping drive Uncle Sam’s annual budget deficit past the one-trillion-dollar mark. Worst of all, the self-inflicted wound that is Donald Trump’s trade war with China is slowing growth, taking a bite out of U.S. manufacturing, and savaging American farmers in precisely those states Trump must carry to stay in office for four more years.
It's no wonder that more and more analysts are ringing the alarm bells about the risks of a recession by the end of next year. As former Obama administration economist Jared Bernstein explained, “A recent analysis by Federal Reserve economists estimates that the impact of the trade war could reduce U.S. real GDP growth by 1 percent by early next year.” Noting that trade policies are weighing on business activity, the nonpartisan Congressional Budget Office recently forecast that “the tariffs imposed under Trump since January 2018 are expected to make U.S. GDP roughly 0.3% smaller than it otherwise would have been.” Goldman Sachs joined the chorus of voices urging caution. Chief economist Jan Hatzius declared last month, “We have increased our estimate of the growth impact of the trade war.” As a result, his company now predicts fourth-quarter GDP to grow by just 1.8% and “calculated the cumulative hit the trade war has dealt to the nation’s gross domestic product at 0.6 percent.”
With just 130,000 jobs added in the U.S. in August and federal payouts to farmers to compensate for their lost sales to China now reaching $28 billion, Hatzius warned, “Fears that the trade war will trigger a recession are growing.” (For those in America’s farm belt, the recession is already here. Battered by low commodity prices, a rising number of bankruptcies, and growing suicide rates, farmers can only lament, “We lost pretty much all of our markets since Trump took over.”)
Now, none of this was supposed to happen, at least according to Donald Trump and his acolytes. Trump, a longtime protectionist dating back to his crusades against Japanese imports in the 1980s, in May 2016 proclaimed, “Who the hell cares if there’s a trade war?” Trump believed his threatened 45% tariff on Chinese products and 35% levy on Mexican goods would not only save jobs in the U.S., but would magically increase economic growth here even as it helped reduce the American national debt. As his top trade adviser Peter Navarro tried to explain it in October 2016:
Some critics will argue that reducing the flow of cheap imports from locales such as China, Mexico, and Vietnam will be inflationary and act as a regressive tax by denying lower-income households cheap imports. In reality, four decades of one-sided globalization and chronic trade deficits have shifted wealth and capital from workers to the mobile owners of capital and reduced the purchasing power of Americans.
A visit to cities like Johnstown, Pennsylvania, and Flint, Michigan, reveals quickly the falsehoods and broken promises of those who preach the gains from trade deficits — which are often financed by those who turn a profit from offshoring production. Trump’s proposals will reverse these trends, concentrate more wealth and purchasing power in the hands of domestic workers and result in substantially higher employment. This will more than offset any price increases. Moreover, as products develop a competitive advantage in America and increase their production and margins, prices per unit will go down.
But Navarro and Trump believe trade is a zero-sum game. As many have explained (for example, here), trade deficits don’t necessarily reduce American GDP and, in fact, can reflect the fundamental strength of the U.S. economy. Just as important, given today’s complex global supply chains, using high tariff barriers to block imports does not necessarily mean all of those goods and services will be replaced by domestic producers. As Noah Smith countered on Bloomberg in December 2016, “Imports don't always hurt growth, and they often complement U.S. production. That's why trade restrictions can backfire.”
Writing on Vox, Matthew Yglesias summed up in September 2016 why Navarro and his co-author Wilbur Ross were so misguided in their economics. “When net exports are negative,” Ross and Navarro wrote, “that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.” As that passage from the two Trumpies revealed, Yglesias said, “They believe that, therefore, we can boost growth by curtailing imports.”
To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.
Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.
What Ross and Navarro were proposing, Yglesias rightly concluded, “doesn’t even remotely work.” As he explained:
According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping $180 billion off the trade deficit, our GDP would rise by $180 billion. With labor constituting 44 percent of GDP, that would mean about $80 billion worth of higher wages for American workers. So why doesn’t Congress take this simple, easy step to boost growth and create jobs?
Well, because it’s ridiculous.
What would actually happen is that gasoline would become much more expensive, consumers would need to cut back spending on non-gasoline items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted incomes falling.
And so it would be with steel, aluminum, wood products, and so on and so on. At the same time, America’s trading partners would retaliate by imposing import duties on U.S. exports, with the punishment boomeranging to our factories, farms, and suppliers.
All of which is precisely what leading analysts and economists warned would transpire if Donald Trump moved forward with his plan to start a trade war.
The New York Times headlined an article on the issue, on May 2, 2016, “Experts Warn of Backlash in Donald Trump’s China Trade Policies.” A 45% tariff on Chinese goods does not mean, however, that his punitive approach would ease America’s economic pains.
In fact, a range of experts agree that Mr. Trump’s proposals are more likely to deepen those problems, particularly if China or other targeted nations retaliate, rather than accept his demands…
“There’s no way a tariff of this kind could deliver the kind of benefits that he’s talking about, and it’s quite wrong to think that the big problem for American workers has been foreign trade,” said J .W. Mason, a professor of economics at John Jay College and a fellow at the Roosevelt Institute, a liberal think tank. “But I think it could be very destructive for the rest of the world.”
But according to Moody’s Mark Zandi, Trump’s trade war against China and Mexico, if fully implemented, would generate calamitous blowback against the United States. As Jim Tankersley wrote in The Washington Post on March 25, 2016,
An economic model of Trump's proposals, prepared by Moody's Analytics at the request of The Washington Post, suggests Trump is half-right about his plans. They would, in fact, sock it to China and Mexico. Both would fall into recession, the model suggests, if Trump levied his proposed tariffs and those countries retaliated with tariffs of their own.
Unfortunately, the United States would fall into recession, too. Up to 4 million American workers would lose their jobs. Another 3 million jobs would not be created that otherwise would have been, had the country not fallen into a trade-induced downturn.
While J.W. Mason, cited by The New York Times, was skeptical of the magnitude of the Trump trade disaster in Zandi’s model, a September 2016 assessment by the Peterson Institute for International Economics forecast similar trouble ahead for the United States. As CNBC documented:
US Republican presidential candidate Donald Trump’s protectionist trade policies would send the US into recession, result in the loss of almost 4.8m private sector jobs and lead to shortages of consumer goods such as iPhones, according to the most detailed study yet of his plan.
The study released on Monday by researchers at the non-partisan Peterson Institute for International Economics illustrates how, even as the New York businessman pledges to boost growth and create millions of jobs, most mainstream economists view his economic policies as dangerous quackery.
Dangerous quackery indeed. And throughout 2016, warnings about the side effects of Dr. Trump’s trade snake oil kept streaming in. In June and again in December 2016, CNBC’s John Schoen provided analyses of the state-by-state impact of candidate Trump’s proposed tariffs:
Trump has also vowed to raise tariffs on Mexico and China. Those higher tariffs would almost certainly cut into U.S. exports, which represent about $2 trillion, or roughly one-eighth of the nation's gross domestic product.
But that impact varies widely from one U.S. state to another, with West Coast states more heavily reliant on Chinese markets and border states seeing the biggest demand from Mexico.
But the states of the supposed heartland of America would share the pain, too. While Canada and Mexico account for nearly a third of U.S. agricultural exports, in recent years the Chinese share has doubled.
Ag exports from the U.S. approached $127 billion in the latest year, and besides being the world’s top corn exporter, the U.S. is a major seller of soybeans globally with about half of the crop going overseas to customers such as China. Ag exports to China have grown more than 200 percent in the past decade and last year topped $20 billion.
“U.S. soybean exports to China have been strong this year,” CNBC reported in November 2016, “but the sharp rhetoric on trade from Trump during the campaign now is translating into tough talk from the communist nation about possible retaliation if the new administration imposes tariffs.” Sure enough, major soybean-producing states, including Louisiana, Ohio, Illinois, and Iowa, were being hammered by Beijing’s retaliatory measures in response to the Trump tariffs
All of which has produced a particularly perverse outcome, at least from the perspective of a Trump supporter. As Patti Domm noted in May 2019,
President Donald Trump’s tariffs hit his voters the hardest, with the top three states most affected by the trade war, all places that helped him win the White House.
Charts compiled by Torsten Slok, chief economist at Deutsche Bank Securities, show Louisiana is the state most hurt by the tariffs, followed by Alaska and South Carolina. Of the top 10 states most affected by tariffs, all but two of them, Washington and Oregon, voted for Trump in the last election.
Facing a slowing economy whose increasingly disappointing performance is largely his own fault, Trump is desperately trying to pin the blame on the “fake news” media, on Democrats, and on the Federal Reserve. On Wednesday, Trump called the Fed board “boneheads” for not driving interest rates down to zero or even going negative. (Such a move at this time would be, in a word, crazy. As David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy put it, “The president is calling for what essentially are emergency monetary policy measures at a time when unemployment is at a 50-year low, the U.S. economy is doing better than its peers’ and is still growing.”)
The last time the Federal Reserve undertook such drastic measures was during the Great Recession that began in December 2007. The Bush administration looked to avoid paternity for its failures, too, by adopting a novel evasion: call it the “Nobody Could Have Predicted” defense. Take, for example, President George W. Bush on Hurricane Katrina’s devastation of New Orleans: “I don't think anybody anticipated the breach of the levees.” Or reflect back on Condoleezza Rice talking about the 9/11 attacks (“I don't think anybody could have predicted that these people would take an airplane and slam it into the World Trade Center, take another one and slam it into the Pentagon”) or the victory of Hamas in the Palestinian elections she advocated (“I've asked why nobody saw it coming”). As he was heading out the door in January 2009, Vice President Dick Cheney ducked any ownership for the implosion of the U.S. economy then underway, declaring that “nobody anywhere was smart enough to figure that out" and "I don't know that anybody did." Then Cheney magically converted failure into a virtue and ignorance into a shield in explaining away the Bush presidency, saying, "No, obviously, I wouldn't have predicted that. On the other hand I wouldn't have predicted 9/11, the global war on terror, the need to simultaneous run military operations in Afghanistan and Iraq or the near collapse of the financial system on a global basis, not just the U.S."
Most if not all of these Bush era calamities were foreseen by some (or even many) inside and outside the U.S. government. But in the case of Donald Trump, his long list of failures was knowable even before he took the oath of office. On health care, taxes, economic growth, the border wall, and so much more, it was abundantly clear that his initiatives would fail and his promises would be broken. Even if you just took him seriously but not literally. And with a growing trade war fiasco and so much else, everyone could have predicted it.
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