TRUMP’S TARIFFS CREATE DOMESTIC CONSEQUENCES

Donald Trump’s 2016 presidential campaign swings throughout our country’s heartland successfully honed in on the loss of manufacturing facilities, the millions of jobs lost, and the difficulties encountered by the farming communities scratching out a living when competing with low priced imports. Trump pointedly identified our deficient balance of trade - a measure of the value of exports of goods an services compared with our imports from other countries - as the culprit. While no country escaped his wrath, China rose to the exalted position of being his primary target. He accurately indicated that it contributed 61% of our entire 2016 deficit.

Trump and his advisors argued that this deficit was concentrated in the manufacturing sector. They asserted that surging imports of low cost Chinese products had not only lowered the wages of our non-college educated workers, they also forced many industries into bankruptcy, which, in turn, led to a loss of somewhere between two and three million jobs during the preceding decades. The “balance of trade” talking point became a simple, convenient, be it unsophisticated populist theme that elevated Trump’s electoral chances. While many economists argue that the trade deficit is not economically significant as an indicator of economic health, and that a larger trade deficit could in fact be the result of a stronger economy, Trump would not let go, and installed the concept as a centerpiece of his economic policies.

As he complained that unfair trading practices were being used against us, Mr. Trump has used the “threat of tariffs” as a weapon to persuade competitors to help us reduce our trade deficit. This strategy did not work out as planned. Our balance of trade deficit with China was almost $44 billion higher in 2018 than it was the year before. Doubling down, Trump increased his aggressive posture against the second largest economic superpower in the world, in an attempt to force it to comply with his demands. On May 5th he announced that he would increase the tariff on $200 billion of Chinese goods to 25%, and threatened to tax the remaining $325 billion to the same percentage "shortly."

He mistakenly, or blatantly, asserted that the tariffs paid to the USA have had little impact on our product cost, claiming that they are mostly borne by China. The latter, in turn, retaliated by announcing plans to impose tariffs on $60 billion worth of American goods, specifically targeting commodities originating in states Trump won by significant margins in 2016. The trade war was on. Donald Trump was fulfilling election promises, making political points in an attempt to solidify his base, even though he clearly displayed his ignorance about how the economy works, and seemed untroubled by the consequences of his impetuous posturing.

Our president falsely claims that China pays the tariffs levied by his administration. In reality, companies like Ford, Walmart and others that import goods from China foot the bill - costs that are passed on to U.S. consumers. Economists calculate that the tariffs imposed on imports from China cost American consumers $68.8 billion last year alone. David Weinstein, an economist at Columbia University, estimates that the latest round of tariff increases will push the annual cost per household well above $800. Larry Kudlow, director of the "National Economic Council" concedes that both sides in the conflict will pay. "Both sides will suffer on this," he said on "Fox News Sunday" recently. "You've got to do what you got to do...The economic consequences are so small that the possible improvements in trade and exports and open markets for the United States, this is worth doing."

However, tariffs not only increase prices, they also kill jobs. "The Tax Foundation" calculated that in 2018 459,816 jobs were lost because of enacted and announced tariffs. The Washington based "Trade Partnership World Wide" estimates that job losses during a U.S.- China trade war would top 2 million if Trump imposes a 25% tariff on all Chinese imports.

Mr.Trump's celebrated constituency of so-called "Patriot Farmers," those still supporting him, but caught between a rock and a hard place, find themselves hoping beyond hope that he knows what he is doing. China's retaliatory tariffs effectively killed the market for domestic producers of agricultural products. A May 19 article in Newsweek quoted a Wisconsin farmer telling Fox News that suicides and bankruptcies in rural America are rising dramatically. A poll backed by the American Farm Bureau reported that 91% of respondents revealed that financial issues are impacting mental health, 87% of farmers fear losing their farms, and one third had sought mental healthcare. With Trump promising that "short term pains" inflicted  on farmers are worth the "long term gains," farmers are asking: "How long is short term?" and "what does success ultimately look like?" Many are beginning to worry that other countries will permanently replace American suppliers. In response, Donald Trump offered another $16 billion bail-out package for farmers most hurt by the dispute - funds paid by the U.S. Treasury Department, not by China.

In addition to all this, economists suggest that these tariffs, if sustained, increase the probability of a recession, could shave 0.25 - 0.35 percentage points off GDP, and would more than cancel out all of the economic benefits of the 2017 tax law. Forbes Magazine, in its May 23rd issue, reported that the Japanese financial services company "Nomura Securities" offered 65% odds that 25% tariffs on additional $300 billion worth of Chinese goods will go into effects by the 3rd quarter of this year. In the mean time, Donald Trump is on record tweeting that he would be happy to leave tariffs in place indefinitely.

Most of our allies agree that we need to do something to reign in China's irresponsible trading practices. However, the consensus is that coordinated action would promise far better results. Trump's gamble does not merit the consequences, intended or not.