trade war

The Dangers of Trump’s Trade Wars

“Check out my non-existent agreement with Mexico!” Photo: Jabin Botsford/The Washington Post/Getty Images

Intelligencer staffers Josh Barro and Benjamin Hart chat about where President Trump’s tariff policy goes from here, after he declined to impose threatened duties on Mexico last week.

Ben: Last week, President Trump backed off on his threat to start imposing tariffs on Mexico, the prospect of which had proved broadly unpopular, even among Republicans (though they weren’t actually about to defy the president or anything too crazy). Trump claims that Mexico agreed to a raft of new measures to curb migration from Central America, an assertion that appears to be more of a face-saving measure than, you know, true. What does this episode say about the limitations of the president’s tariff policy?

Josh: Well, I think one question is whether this is tariff policy at all or whether it’s immigration policy. In the past, the president has complained about Mexico’s trade practices and how Americans have to compete with Mexican workers who will accept lower wages. The proposed replacement agreement for NAFTA has some provisions that would address these concerns on the margins. But his demands to Mexico — he said he’s holding off on these tariffs because he now thinks they may meet them — are all about immigration policy: He wants the Mexican government to stop Central Americans from coming through Mexico to either enter the U.S. illegally or to seek asylum at the U.S. border. I think it’s very unclear that Trump got anything new out of Mexico from this threat, since Mexico had already been taking steps to cooperate with the U.S. on these issues and since Mexico does not apparently intend to sign a “safe third country” agreement like the president wants.

Ben: There were reports, though, that Trump was heartened by what he perceived as a “win” versus Mexico (regardless of the reality) and that this might embolden him to make new demands in his ongoing trade war against China. Do you see this as a significant danger?

Josh: Not if the demands are as hollow as they have been in the Mexico negotiations. The stock markets shrugged off the Mexico tariff threat because it wasn’t out there for long. And more broadly, when the president has made pronouncements he’s not serious about, market actors have become better at understanding that. Stock prices don’t move as sharply as they used to when the president complains about a specific company. But — and this is a key caveat — the president’s trade grievances with China are shared much more broadly on both sides of the aisle than his grievances with Mexico. So he’s more likely to have the political support he needs to make good on threats with China. China is also a bigger trading partner than Mexico. So further escalation of trade tensions with China remains a serious risk.

Ben: Though Trump and China show no real signs of ending the trade war, the effects of it on the broader American economy are still fairly minimal. What would it take for the president’s tariffs to break through as a major concern for the average American and not just in the farming/manufacturing sectors? Would long-threatened taxes on European cars do so? (And is that why Trump hasn’t pulled the trigger there?)

Josh: The tariffs haven’t mattered that much to most everyday Americans because they aren’t very large relative to the economy. Most of our economy is the production of products and services for domestic consumption, which isn’t affected very much by tariffs, especially the services part, which is larger. And most of the tariffs haven’t been that high — the China tariffs until recently were 10 percent, and they only apply to some imports — so they’ve basically acted like a moderate sales tax on a very small slice of the economy. It makes sense that they don’t have a big aggregate impact. And the Trump administration has taken some steps to mitigate the effects in places where they’re especially large, like with subsidy payments to farmers hurt by the tariffs.

The problem is that the actual and proposed escalations in the trade war could make the effects large enough to be more widely noticeable. The China tariffs went from 10 percent to 25 percent, and the president has threatened to about double the amount of goods they apply to. He also threatened 25 percent tariffs on Mexico. If he did all that, those tariffs would have ended up being about eight times as large as they had been as of the end of April. Ernie Tedeschi from Evercore told me this sort of action could cause a hit to GDP of about a percentage point — probably not enough to tip the economy into recession but a very meaningful slowdown people would notice in the form of less employment and slower wage growth. And yes, imported car tariffs are another thing that could go on that pile and make the effects larger.

I should note the negative economic effects come from two places: higher costs to American consumers for goods affected by tariffs, and lower sales to American producers due to retaliatory tariffs that harm exports.

Ben: Some Democrats who have been campaigning against the trade war have framed these tariffs as, simply, a tax on American consumers. Is this an accurate way of thinking about them, and do you think it will be politically effective one?

Josh: They definitely are a tax on American consumers. China does not pay the tariffs, despite what the president says. As for whether they are “simply” a tax, obviously they have more specific economic and foreign-policy effects than a normal, broad-based consumption tax would. As for the politics, virtually anything Trump does ends up being unpopular. Support for free-trade agreements has gone up sharply since the 2016 election and is higher than ever among Democrats, according to Pew. So yes, I think it’s effective to say tariffs are bad. It’ll be even more effective if the economy softens, as Democrats will be able to (accurately or not) blame the softening on the president’s trade policies.

The Dangers of Trump’s Trade Wars