Trump’s Tariffs Are A Growing Threat To The American And Global Economies
This is the eighth article in a series produced by NDN challenging Trump’s tariffs.
Today there is a growing body of evidence that one of Trump’s signature policy proposals, the tax cut, hasn’t delivered the economic returns promised by the President. I will argue in this piece that his other major initiative, the protectionist trade policy, has also failed to deliver on his promises. In launching the tariffs, Trump’s promises to Americans were simple: strengthen growth, reduce the trade deficit, and help US manufacturing. By any account, each one of these has failed. Instead, the trade war is now viewed as a growing risk to the global economy, and threatens to weaken the strong economy that Trump inherited in 2017.
Risks to Economic Growth
Since mid-summer, future growth expectations for the US and global economies have rapidly declined. In Bank of America’s November investor report, 44% of investors expected a decline in global growth in 2019, the highest number surveyed since November 2008 on the eve of the Great Recession. In October, meanwhile, the IMF reduced their forecast of global growth for both 2018 and 2019 from 3.9% to 3.7%, representing a global income loss of almost $530 billion. This weakening of the global economy is likely to put significant downward pressure on US growth as well. Goldman Sachs now forecasts that US growth will fall from 3% this year to 2% in 2019, and will hit only 1.6% in the fourth quarter of 2019. Similarly, JP Morgan estimates that growth will decline from 3.1% this year to 1.9% in 2019, and will hit just 1.5% in Q4 2019.
Trump’s trade policies, which have placed tariffs on $250 billion of Chinese imports and $50 billion of steel and aluminum imports primarily from Canada and the EU, have played an important role in this slowdown. First, higher tariffs mean that domestic companies have to pay more for intermediate inputs, putting downward pressure on jobs, income, and capital investment as firms have to account for higher costs. Second, with less access to cheap foreign goods, the purchasing power of domestic consumers falls, meaning that workers can buy fewer products for every dollar they earn. Finally, tariffs create inflationary pressures by taxing low cost goods, which forces the Fed and other central banks to hike interest rates faster, thereby tightening financial conditions in the global economy. It is no surprise, then, that in Bank of America’s November investor report that found 44% of investors expecting a decline in global growth in 2019, investors cited Trump’s trade war as the biggest risk to the global economy (35% of investors), ahead of the Fed’s rate hikes (26% of investors), and rising corporate debt (14%). Business investment, a key component of growth and something heavily affected by firms’ input prices and consumer demand, has likewise slowed significantly in the face of Trump’s trade policies. Non-residential private investment rose only 2.5% in Q3 2018, compared to an average of 10.1% in the first half of 2018 and 6.3% in 2017. Furthermore, new durable goods orders have fallen for two straight months and are down 1.2% since June, significantly lower than the 2.3% growth seen in January to June 2018.
Worsening of the Trade Deficit
The six months since June have also seen a large widening of the trade deficit, and the US today is running its largest trade deficits since 2008. Since the tariffs were enacted, the trade deficit has increased by 18.1%, compared to economic growth in that period of 1.8%. Since June, the trade deficit has averaged $50.8 billion per month, which is 5% higher than its Jan-May 2018 average, 10.4% higher than its 2017 average, and 21.4% higher than its 2016 average under Obama. Given that one of the biggest impetuses behind Trump’s tariffs was to reduce the trade deficit, the policy as a whole seems to have faltered.
Driving the increase in the trade deficit, firstly, has been a decline in US exports. Exports have fallen at a 0.6% annualized rate since June, compared to an increase of 8% (annualized) in Jan-June 2018, 7.8% in 2017, and 4.1% in 2016. Secondly, US imports have skyrocketed since the tariffs were enacted, even though one of their major purposes was to encourage the substitution of imports with domestic production. Imports have risen at a 12% annualized rate since June, compared to 0.2% (annualized) in Jan-June 2018, 9.7% in 2017, and 4.5% in 2016. These trends are unsurprising given the effects of Trump’s tariffs. Almost $150 billion of US exports have had retaliatory tariffs enacted against them by our trading partners, and crucial intermediate inputs like steel and aluminum have seen their prices rise by over 20%, making American products uncompetitive abroad and at home.
Harms to US Manufacturing
Outside of the major macro-economic goals of improving growth and reducing the trade deficit, the tariffs were also primarily crafted to help US manufacturing. Instead, however, American manufacturing companies have been strongly hurt by the tariffs, and the auto industry in particular has seen its global competitiveness weakened. Since June, the S&P 500 Industrials index (which covers industrial companies within the S&P 500) has fallen by 5.1%. By contrast, it rose at an annualized rate of 11.8% from January 2017 to June 2018 and by an annual average of 14.2% during Obama’s 2nd term.
GM, meanwhile, has seen a 15.2% decline in its stock price since June and earlier this week announced the layoff of 14,000 workers in North America and the closure of five plants. This is on the back of the company losing $1 billion in earnings in 2018 alone as a result of Trump’s steel and aluminum tariffs, and a 15% decline in GM’s sales in China in October as a result of worsening trade tensions. Similarly, Ford’s stock price has fallen 20.1% since June and the company last month announced likely layoffs of 12% of its global workforce (24,000 workers). Ford too reported that Trump’s tariffs would cost the company over $1 billion in earnings this year. Tesla also reported a drop in its China sales of over 70% in October, after warning last month that the trade war would harm its business. Finally, new reports suggest that the 25% tariff on foreign-made autos that Trump is considering would destroy a further 715,000 jobs in the auto industry and reduce annual GDP by $59 billion. Rather than revitalize US manufacturing, Trump’s tariffs instead have reduced its global competitiveness. With rising input costs and constrained export access, US companies particularly in the auto industry have been forced to lay off workers and close plants.
Large Losses in American Agriculture
The second biggest supposed benefactor from Trump’s tariffs were American farmers, who Trump claimed were taken advantage of by Canada and European protectionism. More so than any other industry, Trump’s trade policy has significantly harmed American agriculture. From June to September 2018 (the most recent data), US agricultural exports fell 1.8% YoY and the US trade surplus in agricultural products fell by 26%. As a result, the recent increase in farm bankruptcies throughout the country that began in 2017 has continued unabated, reaching levels over twice as high as those in 2013 and 2014. Soybean farmers in particular have been devastated by Trump’s trade war with China, and have seen a 97% decline in exports over the past three months.
Furthermore, while $12 billion in government bailouts has kept some farmers afloat, the damage done to agriculture (and to the rest of the US economy) will continue long after the tariffs are rescinded. New supply chains that exclude American workers, instead going to Canadian and Brazilian exporters, have been developed in place of American ones that took decades to develop. Further, the level of uncertainty over basic trade policy created by the Trump administration makes it less likely that American or foreign firms will invest in long term projects in the US.
Today there is an overwhelming body of evidence that Trump’s tariffs are unpopular and causing material harm to the US and global economy. The question now is, what do we do about it? In a recent Wall Street Journal interview, Trump showed that he doesn’t understand what he’s doing and that no rigorous analysis backs up his views on trade. As a result, it is unlikely that he can offer ideas to address the growing risks of the trade war with China and the conflict with our closest allies over auto tariffs. It will be up to members of both parties in the next Congress to challenge Trump far more directly on his reckless trade policies, and remove the threat to the US and global economies.