Trump’s Tariffs Will Do Lasting Economic Damage If Not Opposed

(This is the third essay in a series challenging Trump’s tariffs)

By: Chris Taylor

Much of Trump’s trade policy has been centered on his idea that trade wars are easy to win and will lead to quick re-negotiations of trade agreements. In his mind, therefore, the use of false justifications to sidestep Congressional oversight and a refusal to engage in real economic analysis would not be a problem, because the tariffs would be quickly and painlessly rescinded once the trade agreements were revised. Two months into the trade war, however, the opposite has come true. Our trading partners have not come to the table, but instead have imposed painful retaliatory tariffs on US industries already reeling from higher import prices. With no end in sight, Trump’s tariffs have done significant damage to the economic health of the country, and they threaten to permanently harm the competitiveness of American workers.

First, Trump’s tariffs have harmed industries that rely on imported products, predominately steel and aluminum, as inputs for their own products. Heavy manufacturing companies, such as equipment producers Caterpillar and John Deere, have reported a drop in earnings of almost 10% since the tariffs took effect, as steel is the industries’ largest raw material cost and Trump’s tariffs have increased its price by 25%. Small manufacturing businesses have felt the largest negative impact, because they don’t have the economies of scale to cushion a significant increase in costs. Lawn equipment producers in Indiana have been forced to cut 40% of their workers, nail manufacturers in Missouri have axed 15% of their workforce, and television-manufacturers in South Carolina have closed their plants. The construction industry, which employs over 7 million mostly blue collar workers, has in particular been harmed by Trump’s trade wars. Tariffs on steel and aluminum alone are estimated to cause the loss of 28,000 construction jobs as the raw materials and heavy equipment used in the construction process have become significantly more expensive. All told, the non-partisan Trade Partnership group estimates that Trump’s $22 billion in steel and aluminum tariffs alone will cause a loss of 179,000 jobs in manufacturing and services, far outpacing the estimated 33,000 job increase in steel and aluminum production.   

Second, Trump’s tariffs have led to the imposition of retaliatory tariffs on US exports by China, Canada, and the European Union. The agricultural industry, whose exports are heavily affected by Chinese demand, has been hit particularly hard, with the prices received by American farmers for soybeans falling over 16% to decade-long lows and prices for hogs and corn falling by 15%. In Iowa alone, farmers could lose $630 million as a result of losing export access to foreign markets if Trump’s tariffs stay in place. Trump himself has conceded that his tariffs are harming agriculture, which led him to provide a $12 billion bailout to struggling farmers. Even this significant amount (over $14 for every $100 of imports affected by the tariffs) isn’t enough to stop the damage from reciprocal tariffs, however. The US Chamber of Commerce estimates that bailouts to cover losses from retaliatory tariffs for all US industries would require an additional $27.2 billion in funding, of which $7.6 billion would affect automobile manufacturers and $9.6 billion other manufacturing industries. Rather than save US manufacturing, the trade wars are destroying jobs and creating bailout-dependent industries.

Finally, Trump’s tariffs are having a significant impact in an area often missed in the political discourse: business investment. For investors at home and abroad trying to invest their capital, the loss of export access for US industries and the extremely volatile policy environment in Washington has acted as a severe roadblock to investment in new factories and infrastructure. Net foreign direct investment (the level of investment coming into the country minus the level leaving the country) fell by 37% from the first quarter of 2017 to the first quarter of 2018. From January to May 2018, Chinese net investment in the US was actually negative $7.8 billion, meaning that more investment funds left the US than entered, in the midst of a 90% drop in Chinese investment into the US in 2018.

It is abundantly clear that Trump’s tariffs have been damaging for the US economy: fewer jobs, struggling companies that require government bailouts, and an exodus of investment spending. This lack of economic success mirrors the difficulty that the Trump administration has had in keeping its promises of an economic “revival” for the economy as a whole. In the 18 months since Trump became President, 300,000 fewer jobs were created than in President Obama’s last 18 months in office. Even worse, real average wages declined by 0.2% from July 2017 to July 2018, weakening Trump’s claim that his $1.9 trillion tax cut would help the middle class.

In particular, President Trump was elected to office on a message of creating economic opportunities for those left behind by this new age of globalization. By most metrics, however, he has failed to meaningfully improve the living standards of these “forgotten Americans”. In fact, from July 2017 to July 2018, 35.4% of counties that voted for Trump in 2016 actually lost jobs on net, compared to only 19.2% of counties that voted for Clinton. Trump’s tariffs have further harmed the economic opportunities of these people who most supported the president. In the Rust Belt, manufacturers from the auto to the household appliance industries have lost significant consumer bases and earnings, forcing them to lay off thousands of workers, while farmers across the Midwest are seeing their profit margins turn negative as prices for their crops plummet. The hardest hit groups haven’t been white-collar workers in coastal cities, but instead manufacturing, construction, and agricultural workers in states that voted for Trump.

Furthermore, the effects of the trade wars won’t go away anytime soon, even if the tariffs are rescinded. Domestic manufacturers and farmers have seen their export consumer bases eroded by cheaper foreign competition as a result of the tariffs (for example, Brazilian and Canadian soy bean exports to China that aren’t subject to reciprocal tariffs). These consumer bases take decades to build up, and their loss means that even when the tariffs are rescinded, US workers will have less access to foreign export markets for years to come, if at all. Indeed, Chinese officials have begun to say that American agricultural exports will be fully replaced by other countries’ exports, even after the tariffs are rescinded.

The first and second essays in this series argued that Trump’s tariffs were illegal and based upon utter ignorance by the President. Beyond that, the tariffs are enacting large costs onto average American workers, particularly those that were promised better economic opportunities by Trump during the 2016 election.  Congress must act to rescind these tariffs, before US manufacturers and farmers permanently lose out on the 86% of global demand that is outside of the United States.