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A Partial Trade Deal With China Mitigates One More Trump-Economy Risk

There’s a deal! Photo: Jim Watson/AFP/Getty Images

The most important thing about the “phase one” trade agreement announced Friday by U.S. and Chinese officials is what won’t happen: The two countries won’t impose additional tariffs on Sunday that would have further escalated the trade war.

There will also be a bit of de-escalation. In September, Trump imposed 15 percent tariffs on $110 billion worth of Chinese consumer goods, such as clothing; those tariffs will be cut in half, to 7.5 percent. But the largest piece of Trump’s China tariffs — a 25 percent tariff on $250 billion in goods mostly sold to businesses rather than consumers — will stay unchanged, for now.

Ernie Tedeschi, a former Treasury Department economist now at the investment firm Evercore ISI, estimates this agreement (assuming it sticks) will be good enough to increase U.S. GDP by 0.15 percent next year, compared to a scenario where we were unable to come to terms with the Chinese, and the tariffs scheduled for imposition this weekend had gone into effect.

“Most of that is the avoidance of the ‘penalty tariffs,’” Tedeschi said, referring to 15 percent tariffs on a further $190 billion in Chinese goods, including electronics, that Trump had threatened to impose this weekend, but now won’t. Mostly, Trump has announced that he will not do a new thing to make the economy worse; the growth effect from reducing tariffs already in place is quite small, maybe worth 0.03 percent of GDP next year, according to Tedeschi.

Of course, numbers that small are an invitation to excess specificity. We don’t know exactly how much the tariffs matter, and these effects are too small to precisely isolate within an economy that grows and shrinks because of many factors. But there is clarity among economists about the sign, if not the size of the effect: Tariffs shrink the economy, and fewer tariffs means shrinking the economy less.

I discussed with Benjamin Hart last week the various ways in which Trump-related economic risks have abated over the last year. This is one more example, and another reason to feel a little bit better about the economy at the margin.

Trade Deal With China Mitigates One More Trump-Economy Risk