President Donald Trump is heading into an election year touting a trade deal that promises to double U.S. exports to China, which he says has pledged a $200 billion, two-year spending spree on everything from airplanes to pork chops and chicken feet.
Yet the inescapable reality is that even this extraordinary splurge -- if it happens -- may not make up the economic cost of the trade war it seeks to defuse.
The precise toll of an economic conflict that is far from over is difficult to isolate and is the result of everything from the direct cost of tariffs to intangibles like the role of uncertainty on business confidence. It also gets at a theological debate in economics that sees ideological supporters of Trump’s tariffs argue prior waves of protectionism are unfairly maligned by history.
Economists who have calculated the impact of U.S. tariffs, most of which will remain in place, and China’s retaliatory measures have put the economic losses -- including the impact of the resulting uncertainty -- at a cost in lost output ranging from 0.3% to 0.7% of real gross domestic product this year alone. But even with the phase-one trade deal, many economists expect the tariff drag to extend for years, as stymied business investment, lingering uncertainty and the billions of duties still in place take a toll on future growth.
While a few tenths of a percentage point may not seem like much, it’s consequential in the world’s biggest economy. In 2019 dollar terms, Bloomberg Economics estimates the cost in lost U.S. GDP has reached $134 billion to date and will rise to a total of $316 billion by the end of 2020.
A study by researchers at the New York Fed and Princeton and Columbia universities estimated the cost to consumers of the bulk of tariffs that will remain in place, despite the latest deal, at $831 per household per year -- or an annual cost of more than $106 billion for the U.S. economy as a whole.
That alone would more than wipe out the gains from the Chinese buying surge Trump’s team has negotiated.
“The purchases get us back to where we were before this all started,” said Maurice Obstfeld, former IMF chief economist and member of President Barack Obama’s Council of Economic Advisers. “So you have to ask: ‘What’s been gained? And was it worth putting the economy through the wringer?’”
The costs are also not one-time and are likely to build up for years, based on economists’ calculations -- even as businesses get used to the tariffs, or adjust supply chains, and the initial deal helps at least calm fears of a further escalation.
The International Monetary Fund’s estimates are that the U.S. tariffs will subtract from real GDP in every year to 2023, when real GDP will be 0.5% lower than what it would have been had the duties not been imposed. The Congressional Budget Office earlier this year built its analysis on the assumption the tariffs could still be in effect in 2029 and subtract 0.1% from U.S. economic output that year.
The administration and its supporters argue they are in a bigger fight to address longstanding American complaints with China that will be to the long-term benefit of U.S. businesses and workers. They point to a U.S. economy growing faster than its peers and continuing to generate plenty of jobs as vindication of its trade policies. Revised data on Friday is expected to confirm the U.S. economy grew at a 2.1% annualized rate in the third quarter. In November, the economy created a better-than-expected 266,000 jobs.
Trump has also repeatedly denied any negative impact from his trade policies and instead blames what he portrays as a timid Fed and a strong dollar for not allowing the U.S. economy to grow as fast as he would like. “There is no uncertainty,” he told the Economic Club of New York on Nov. 12.
Larry Kudlow, the head of Trump’s National Economic Council, this week said he expected the combination of the deal with China, which is due to be signed in early January, and the imminent passage through Congress of an update of the North American Free Trade Agreement to add 0.5% to U.S. growth.
Kudlow’s estimate is based on a mix of independent and internal analyses, the White House says. But it won’t say any more. It also has not released any analysis of the economic impact of the China deal, or of the broader economic conflict.
A challenge facing critics of Trump’s trade wars is that the economic effects in the U.S. have been countered by strong national-level data and the ability of a robust economy, driven largely by domestic consumption, to absorb the impact on the manufacturing and farm sectors.
But the negative effects are real, argue economists like Mark Zandi, chief economist at Moody’s Analytics.
From the third quarter of 2018 to the same quarter this year -- the period in which the trade war really started to bite -- Zandi calculates the U.S. lost 0.4% of real GDP to Trump’s various trade measures, or $88 billion. It also lost 340,000 jobs to the trade wars, he contends, via a mix of stalled investment and higher costs due to new import duties.
The uncertainty affecting business decisions isn’t evaporating, Zandi said, and “that will continue to weigh on business investment, hiring and wage growth and will have continued negative consequences for the economy.”
At Northwest Hardwoods, the U.S.’s largest exporter of timber used in everything from coffee tables to kitchen cabinets, the impact of the trade war has been stark.
A toxic mix of new U.S. tariffs on furniture made in China that has hit demand there and Chinese retaliatory duties has led to a 40% collapse in an export business that for the U.S. industry was worth $2 billion annually before the trade war, said Nathan Jeppson, the company’s CEO.
“We feel a bit like roadkill on this path,” he said.
The company has responded by shutting down plants in Virginia and Washington state, laying off 225 of its 1,700 employees.
Those jobs seem unlikely to return in a hurry.
U.S. trade officials have said an increase in sales of hardwoods to China will be part of the new buying spree. They haven’t provided any details, though, and Jeppson can’t commit to reopening anything.
“We need to see a sustained recovery in demand and pricing in order to reinvest in any facilities or reopen any plants,” said Jeppson. “We have been so badly hurt by the last year and a half that we are going to be very cautious.”
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