The weekly report by trade correspondent L.C.
“I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House,” President Trump tweeted on New Year’s Eve morning. Both sides, as previously reported, will be reducing tariffs on each others’ products and China will expand its purchases of US farm products. But as 2019 comes to a close, President Trump’s trade wars cannot be accounted a success.
While the Phase One trade deal with China is being greeted with cautious relief by business, as is Congress’s recent approval of the US-Mexico-Canada Agreement (USMCA), a study by Federal Reserve economists in September concludes that his trade wars reduced US GDP by 1%. That, as the Wall Street Journal noted at the time, is “the difference between the 3% annual GDP growth trend following tax reform and the 2% path of recent months.”
Fed: US tariffs have hurt US manufactures
More bad news followed last week from two economists at the Fed’s Research & Statistics and Monetary Affairs division, who published a preliminary working paper titled “Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected US Manufacturing Sector.” (33-page pdf download here)
The paper grabbed attention for being one of the first in-depth data analyses of the impact of the Trump tariffs, especially the Section 301 tariffs, on the domestic economy, in particular on the US manufacturing sector. It found the impact to be negative, despite the fact that boosting manufacturing was a stated goal of the tariffs. As one trade lawyer pithily tweeted in response to the study, “It’s also another reminder of the irony of the Trump economy: the things he disdains/ignores – consumers & services – are fueling the US economy, while the things he supposedly champions – farmers & manufacturers – suffer.”
While earlier economic studies of tariffs have almost always found them to be harmful, this was among the first to look at a developed country imposing tariffs since the intensification of integration of global supply chains and the increased dependency of many US manufacturers on export markets. These new factors added to the negative impact of President Trump’s trade wars.
According to the new Fed paper, “our results suggest that the traditional use of trade policy as a tool for the protection and promotion of domestic manufacturing is complicated by the presence of globally interconnected supply chains. While the potential for both tit-for-tat retaliation… and input-output effects on the domestic economy have long been recognized by trade economists, empirical evidence documenting these channels in the context of an advanced economy has been limited. We find the impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.”
As the paper further explains, “Since the beginning of 2018, the US has undertaken unprecedented tariff increases, with one goal… being to boost the manufacturing sector. In this paper, we estimate the effect of the tariffs – including retaliatory tariffs… – on manufacturing employment, output, and producer prices. A key feature of our analysis is accounting for the multiple ways that tariffs might affect the manufacturing sector, including [protecting] domestic industries, raising costs for imported inputs, and harming competitiveness in overseas markets due to retaliatory tariffs.”
And, repeating the conclusion, “We find that US manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.”
The paper includes appendixes and multiple charts and tables. It studied primarily “the tariffs enacted in 2018, with the estimated effects through August 2019” – that is, not the Section 301 4A tariffs imposed on September 1st. The authors say they may study the following period next, but their results thus far “suggest that the effects of this later round… will be highly dependent on the composition of affected products,” which focused on consumer rather than intermediate goods. “Therefore, the input cost channel [for the List 4 tariffs] could play a smaller role in the effects of the 2019 tariffs on the manufacturing sector.”
The authors caution that “the longer-run effects of the [2018] tariffs could be qualitatively different than the short-run effects that we estimate here. On the one hand, there may be more substantial expansion of US manufacturing activity in the longer-term as firms fully adjust their supply chains to avoid US import tariffs, highlighting a potential longer lag structure for the import protection channel. That said, there is suggestive evidence that the US is not typically the immediate destination for production relocation from China due to increased tariffs.”
The Trump Administration would echo this cautionary note, since it argues that it is too early to determine the impact of the president’s trade policy because it is aimed at forcing long-term changes to the international economy through adjustments in supply chains, re-shoring of manufacturing to the US, and changes to China’s own trade practices. These effects, however – as the report indicates – have yet to show up.
The role of uncertainty
It should be noted that the study didn’t take into account the impact that uncertainty over US trade policy has had on business confidence and therefore business investment. Some analysts attribute much of the decline in the manufacturing sector to this factor. The US International Trade Commission, in assessing the USMCA, claimed that ending uncertainty would be a main cause of that trade deal’s positive impact, thus suggesting how damaging uncertainty is for the economy. If accounted for, this uncertainty factor could have led to the Fed economists finding that the tariffs were even more harmful to US business investment.
There have, of course, been other studies finding that tariffs are harmful and counterproductive, but as noted, the Fed study is one of the few that looks at the most recent experience. UNCTAD, for instance, found that the US Section 301 tariff hikes “are economically hurting both countries.” The Tariffs Hurt the Heartland association and the Peterson Institute for International Economics similarly found negative effects of the tariffs. The Fed study, however, adds a more detailed level of economic data and analysis.
Among earlier studies, the IMF released a working paper early this year on “Macroeconomic Consequences of Tariffs” that looked at the experience of 151 countries from 1963-2014. Its main finding meshes nicely with the new Fed study: “We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance.”
There is, of course, no reason to think that this new study will persuade the president away from his use of tariffs — though perhaps it will be another reason for him to disparage the Fed. Still, he was convinced, though apparently for political reasons rather than economic arguments, to deescalate the tariff war with China, and there have long been reports that most of his advisers (apart from Peter Navarro) understand that tariffs are an unsustainable and counterproductive tactic. Moreover, the only likely remaining target for tariff escalation is the EU. But the White House hopes to engage in “phase two” trade talks with China and Japan this coming year or at least soon after the elections. The president seems more eager to keep these talks alive than talks with the EU that have yet to materialize.
Fuel for critics
Meanwhile, his enemies are having a grand time celebrating the president’s trade-war bungle. The NY Times partisan economist, Paul Krugman, writes:
[T]he Trump administration achieved almost none of its goals…And the Chinese know it….Chinese officials are “jubilant and even incredulous” at the success of their hard-line negotiating strategy….Trump wanted to slash the U.S. trade deficit…. So it’s remarkable to note that the trade deficit has risen, not fallen, on Trump’s watch, from $544 billion in 2016 to $691 billion in the 12 months ending in October. And what Trump wanted in particular was to close the trade deficit in manufactured goods…So now we appear to have a trade deal with China whose main substantive element is … a promise to buy more U.S. farm goods..There will, however, be longer-term costs to the trade war….[T]he business uncertainty created by Trump’s capriciousness won’t go away…Beyond that, Trump’s trade antics have damaged America’s reputation. On one side, our allies have learned not to trust us. We have, after all, become the kind of country that suddenly slaps tariffs on Canada — Canada! — on obviously spurious claims that we’re protecting national security. On the other side, our rivals have learned not to fear us. Like the North Koreans, who flattered Trump but kept on building nukes, the Chinese have taken Trump’s measure. They now know that he talks loudly but carries a small stick…Having a leader who is neither trusted by our erstwhile friends nor feared by our foreign rivals reduces our global influence in ways we’re just starting to see. Trump’s trade war didn’t achieve any of its goals, but it did succeed in making America weak again.
https://www.msn.com/en-za/news/editorpicks/how-trump-lost-his-trade-war/ar-BBY3YYS
Mobilizing the US — and world — against Chinese threats will have a more positive effect than Krugman allows but only if accompanied by smarter tactics and strategy than President Trump’s trade wars have demonstrated so far.
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