Daily Traders Edge

How Much Damage Will Trump’s Trade War Do?

July 17
10:32 2018

Will Donald Trump’s trade war tip the economy into a recession?

It seems a reasonable question to ask. The White House has initiated a rapidly escalating global tit for tat, with thousands of products from the United States, China, Canada, Mexico, and Europe now affected or threatened by tariffs. The price of imported goods is increasing. The demand for exported goods is falling. American businesses are laying workers off, and some are warning that they might end up bankrupt.

In some sense, Trump could not have picked a better time to engage the country in a pointless, destructive round of mercantilism: The country’s pace of growth is so strong that the tariffs should have only a muted effect on headline GDP and jobs numbers, economists think. Still, certain industries and certain places stand to suffer considerably—and this growth-chilling trade war might be hard to call off in the event that the economy were to slow down.

The war is being fought on multiple fronts, and with several different justifications. Trump has taken aim at China for engaging in a variety of unfair market practices, including stealing American intellectual property. He has decried the North American Free Trade Agreement, shared with Mexico and Canada, arguing that it rips off American businesses. And he has said that the European Union’s trade practices are unfair, too. “They put up barriers so that we can’t sell our farm products,” Trump said at a Minnesota rally last month. “Yet they sell Mercedes and BMW, and the cars come in by the millions. And we hardly tax them at all.”

With the idea of aiding American businesses and punishing overseas trading partners, the White House has threatened or slapped tariffs on more than $200 billion of imported goods, leading to retaliation. Solar panels, jeans, motorcycles, pork, soybeans, steel, aluminum, cars, insect repellent, tilapia, lobsters, cranberries, cheese: The list of items caught in the crossfire is large and growing. That has forced more and more businesses to react. Some companies, like domestic commodity producers, have benefited from the tariffs. Others have said they would shift production overseas to avoid them, alter their supply chains to soften the impact, or start passing price increases onto consumers.

The effect on American growth stands to be small but noticeable, economists said. Paul Ashworth, the chief U.S. economist at Capital Economics, said he estimated the hit at 0.1 or 0.2 percentage points of GDP. Morgan Stanley put the direct impact at 0.3 percentage points, with a variety of other forecasters and economic analysts coming up with similar numbers. “There is no question that the short-run impact of the tariffs is to weaken GDP,” said Chris Varvares of Macroeconomic Advisers by IHS Markit, a forecasting firm. That said, he added, “even sizable tariffs are not recession inducing” given the kind of growth the country is seeing right now.

But the trade war is more than just tariffs. Trump’s actions might reduce consumer confidence, undercut business investment, and reduce investors’ appetite for risk. Companies anticipating more tariffs and export barriers, for instance, might choose not to expand their operations in the United States. “Since workers and firms don’t know if they might be impacted by retaliatory tariffs, including losing your job or shutting down your firm, the U.S. imposing tariffs is the economic equivalent of a game of Russian roulette,” Varvares said, adding that the economic impact of such decision making was far harder to model and measure.

Continue Reading at The Atlantic

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