President Trump, Please Stop the Trade War with China Before You Get Us in a Recession

Ever since Donald Trump started his presidential campaign, he has made it a part of his platform to demonize China. Trump went as far as saying that Chinese trade policy is akin to raping the United States. Although Trump broke his campaign promise to declare China a currency manipulator (even if they were, not a big deal), he has gone after China hard. This year, Trump has taken his protectionist trade policy seriously. Earlier this year, I rebuked Trump for his tariffs on solar panels, as well as on aluminum and steel. I thought that was going to have an adverse enough of an effect on the economy. It was a moment I thought that Trump was not going to pursue further protectionist trade policy. I was wrong. Last month, he enacted a 25 percent tariff on $50 billion worth of Chinese goods. China unsurprisingly responds in kind. Then Trump went to a 10 percent tariff on $200 billion worth of goods (see analysis here). You think he would have stopped there, but he did not. Late last week, Trump threatened to put tariffs on all $500 billion-plus of Chinese goods. Trump thinks he is in the right because, as his administration reports, China's intellectual property theft has been costing the United States $600 billion per year. Aside from retaliating against China for this theft, Trump has also made arguments about national security and trade deficits. Is history going to look kindly on the trade war that Trump has started with China?

Cost to Consumers: The American Action Forum found that Trump's 25 percent tariff on the $50 billion would cost consumers $11.5 billion a year. With the modified $200 billion in tariffs, that net cost to consumers increased to $31.5 billion a year. Looking at the washing machine tariff specifically, prices increased 16.4 percent from February to May 2018, which is the largest increase we have seen in the past 40 years. It is not at an all-time high, but it another piece of the puzzle showing how tariffs affect consumers. Steel prices have also increased since Trump enacted the steel tariffs. The New York Times estimates that if a 10 percent tariff were enacted on all Chinese goods, it would cost households an average of $270 annually. Although this might not seem like a terribly large amount, lower-income households could feel the squeeze because they are more likely to purchase Chinese products than their higher-income counterparts.

GDP Loss: Consultancy Capital Economics predicts that in the long-run, the global GDP will drop 2-3 percent (and the U.S. GDP 1 percent) more than it would without the trade war. Capital Economics is not the only one with such a prediction. The Wharton School of Business, which happens to be the alma mater of President Trump, predicts that an all-out trade war would reduce the GDP by 0.9 percent relative to status quo by 2027, and 5.3 percent by 2040. The Tax Foundation has a less dire prediction than Wharton, at a decrease of 0.47 percent. As for the Chinese GDP, there is to be an anticipated decrease by 0.1 or 0.2 percent points in the next decade.

Negative Impact on U.S. Businesses: The St. Louis Federal Reserve expressed concern over the prevalence in which U.S. manufacturers use Chinese intermediate inputs in their manufacturing (see below). The cost to businesses goes beyond the immediate price tag of tariffs. There is also the reality that altering supply chains will be time-consuming and costly. These tariffs are going to hit multinational supply chains hard and make it more difficult for the United States to compete in global markets (Lovely and Yang Liang, 2018).

Lower Wages: There are multiple ways that a business can absorb the costs of a tariff, one of them being to cut wages and benefits of workers. The Wharton study mentioned earlier found that wages will fall 1.7 percent by 2027 relative to status quo, and 4.9 percent by 2040.

Lower Employment: For those employers who cannot sustain the tariffs with mere wage cuts, they will go to cutting jobs. If Trump goes all-in on the trade war, the Tax Foundation estimates a loss of 346,786 jobs. This is unsurprising since this has happened with other tariffs, most recently with Trump's steel tariffs. If Trump implements the auto tariff he proposed back in May, that would mean another 195,000 jobs lost in one to three years (Robinson et al., 2018).

Other Long-Term Effects: You might look at the figures above and say that it's not a big deal. "After all, the U.S. economy has a GDP of over $19 trillion. It can handle these tariffs." It is not solely about the short-term impacts I covered above, but also crowding out private investment, reducing consumer confidence, diminishing foreign investment flows into the United States, creating larger external deficits, and creating a level of trade policy uncertainty that we have not seen this century. The Federal Reserve expressed concerns last month about how tariffs are diminishing foreign investment and capital spending. These are the exact sort of economic effects and conditions that slow down economic growth and have a high likelihood of dragging the United States into a recession, which could very well have a contagion effect that drags down other economics down along with the United States.

Conclusion
What should be more worrisome about the sources I cite above are just what research has been produced and released in 2018 alone. I have covered the topic of tariffs before (see here and here). Between economic theory, near unanimity among economists, and the abundance of empirical evidence showing how badly tariffs screw over so many people in many ways, including higher prices, lower wages, lower levels of unemployment, lower economic output, and less economic stability. In case a damning amount of evidence is not enough, the arguments that Trump uses for intellectual property theft, against trade deficits, or for national security to justify the tariffs are flimsy at best, and economically illiterate and deleterious at worst.

Trump's trade war goes beyond retaliatory tariffs on China. Trump labeled the European Union a commercial foe. Trump is even going after Canada and other allies with tariffs. Trump threatened to withdraw from NAFTA. While imperfect, NAFTA has created net benefits, and such withdrawal would mess with North American trade. Trump also reportedly wants to withdraw from the World Trade Organization (WTO), which would diminish the ability to resolve international trade disputes. Between withdrawing from the Trans-Pacific Partnership and these tariffs, Trump is giving China better leverage to strengthen trade relations with China's neighbors while diminishing U.S.-Asian trade.

I'm not here to say that China's compliance with WTO standards have been perfect because it has not. China should be held accountable, which is why we have the WTO. Tangentially, what also worries me is what China could do beyond tit-for-tat, retaliatory tariffs: they could more heavily regulate U.S. companies in China, cut off trade on rare earth metals, or sell of the $1.7T in U.S. Treasury bonds it's holding, thereby increasing interest rates. Trade escalation such as what we are seeing now has never boded well for the United States.

  

I would like to see a bilateral trade agreement with China or at least for the United States to use the WTO Dispute Settlement Process because either would be an example of a preferred policy alternative. However, I am not hopeful of that. We have a bigger issue, and that is a zero-sum mentality on trade when it is, in fact, positive-sum. Protectionism is stupid and immoral, plain and simple. It is the sort of thing that should have died in the 20th century along with Nazism and Communism. If this trade war goes full-blown, history will not be kind to Trump or the legislators who stood by idly as this atrocity took place. I hope Trump comes to his senses or that Congress exercises its constitutional right of setting tariffs to stop Trump from this insanity.




12-4-2018 Update: The Tax Foundation recently ran its data on what the impact of Trump's tariffs on China are. If Trump imposes the 25 percent tariff on all Chinese goods, then it will cause an additional loss of 65,000 jobs and cost $21B to the GDP, which is on top of the damage the current tariffs are causing. Hopefully, Trump and Xi can work out some sort of ceasefire so they can stop causing damage to the global economy.

4-22-2019 Update: The University of Chicago recently released a paper on Trump's tariffs on washing machines. The tariffs brought in $82 million of revenue last year while raising consumer prices of $1.5 billion (or about $92 per washer). This means that the 1,800 washer production jobs created cost about $817,000 per job.