Kimberly Ann Elliott
Almost every week of late, it seems something new, startling and historically unusual is happening in U.S. trade policy. President Donald Trump’s actions are undermining the credibility of American negotiators, increasing uncertainty for traders and investors, domestic and foreign, and potentially threatening to throw the economy into recession. This is all happening in part because Trump refuses to acknowledge that Americans pay the tariffs he likes so much, and also because he still doesn’t understand how global supply chains work. With so many head-spinning developments this spring, it can help to step back and take stock of where things stand, how we got here—and just what the point of it all is.
One of Trump’s first actions after taking office in 2017 was to withdraw from the Trans-Pacific Partnership, or TPP—the major free trade deal with 11 other Pacific Rim countries that had been President Barack Obama’s signature piece of trade policy. Perhaps Trump thought the agreement would collapse without U.S. participation. If so, he miscalculated. With Japan leading the way, the other 10 countries moved forward to implement the agreement without the U.S., and it entered into force at the end of 2018. At that moment, the parties to the new deal began lowering their barriers to one another’s exports, putting U.S. exporters at a disadvantage, especially American farmers who rely heavily on the Japanese market. So far, the Trump administration has made little progress negotiating a separate bilateral trade deal with Japan.
At the beginning of 2018, the Trump administration went on the offensive, imposing tariffs on solar panel components and washing machines because those industries claimed they had been injured by imports, mainly from China and South Korea. These actions were taken under a safeguards mechanism that is seldom used in Washington because the tariffs apply to all imports in the affected sectors, and they can be relatively costly for consumers. In the case of washing machines, the safeguard action proved more costly than expected because manufacturers, taking advantage of the fact that consumers frequently buy washers and dryers together, raised the price of both items by more than 10 percent. Overall, analysts estimate that U.S. consumers paid $1.5 billion more for washers and dryers in 2018 as a result of the tariffs.
In the spring and summer of 2018, the White House adopted more sweeping measures. The first targeted imports of steel and aluminum with 25 percent tariffs that affected almost every country in the world. The use of a national security rationale to justify the tariffs was not unprecedented, but it has been used only a handful of times by an American president since the Trade Expansion Act of 1962 granted those authorities more than five decades ago. Trump’s later threat to impose similar tariffs on automobiles and automobile parts would be unprecedented in that the national security rationale is so blatantly bogus. It would also be extremely costly and, contrary to what Trump seems to think, it wouldn’t be so great for American-based automobile manufacturers and their workers, either. Unlike in the steel and aluminum case, the U.S. automobile industry uniformly opposes tariffs on their products.
The Trump administration’s next move targeted only China, but the action quickly escalated from $50 billion in imports to $250 billion. The administration also increased the tariffs on the second tranche of $200 billion from 10 percent to 25 percent this spring, and is threatening to extend the tariffs to everything China exports. The Chinese government, along with the European Union, Canada, Mexico and other U.S. trade partners, retaliated against these actions with tariffs of their own against American exports. Researchers at the Peterson Institute for International Economics have compiled a complete timeline of the tit-for-tat tariff war that seems to get longer by the day.
The administration’s only significant negotiating success so far is the renegotiation of NAFTA, now dubbed the United States-Mexico-Canada Agreement. But that deal mostly replicates the terms of the TPP that Trump rejected early on—except without the access to the Japanese, Vietnamese and other markets across East Asia that the TPP would have provided. And now even the USMCA is at risk because of Trump’s latest temper tantrum over the increasing flow of migrants from Central America on the U.S.-Mexico border.
What is perhaps most distressing about Trump’s trade policy is that the endgame remains a mystery.Mexican negotiators were able to avert Trump’s recent threat to impose 5 percent tariffs on their exports to the U.S. by promising to more aggressively curb migration and allow more asylum-seekers to stay in Mexico while awaiting the adjudication of their claims in U.S. courts. But the threat to use import tariffs as a sanction to coerce concessions in an unrelated area is unprecedented. In this case, it also underscores Trump’s failure to grasp how modern supply chains work, especially in the tightly integrated North American market. Many goods, including automobiles and auto parts, cross the border multiple times as they go through various stages of production. If importers had to pay the 5 percent tariff each time these products reentered the U.S. market, the cost of the tariff would quickly escalate. Because of the high costs to the economy and to U.S.-Mexico relations, there was intense pressure on the Trump administration to strike a deal. It is still not clear how much of what Mexico promised to do is really new, or how effective it will be in reducing the migrant flow.
Overall, there is no question that foreign exporters are taking a hit from decreased demand for their products, as a result of higher tariffs from Trump. But recent studies show that it is American firms and consumers who are paying most of the extra tax applied to imports. One new study estimates that the 2018 tariff increases cost the average American family of four nearly $500—and that cost will rise to $860 per year as a result of the expansion of the tariffs against China in May. A recent study from the Federal Reserve Bank of New York comes to similar conclusions and calculates that increased tariffs have more than offset the gains from the domestic tax cut for low- and middle-income households. A 5 percent tax on Mexican exports would have raised the cost for that typical American family of four to more than $1,000, while fully implementing the threatened tariffs on all imports from China would raise the figure to $2,000 per year.
There are also growing signs that all this chaos and uncertainty is negatively affecting the American economy at large. Measures of manufacturing activity are declining; the stock market has become more volatile of late; and job creation dropped off sharply last month. There are also growing concerns that the Federal Reserve may feel the need to lower interest rates to offset how Trump’s trade wars are depressing economic growth, which would leave the Fed with fewer tools to respond if a recession hits.
The costs don’t stop there. The tariff threat against Mexican imports, coming the same day that all three countries took steps toward ratification of the USMCA, did enormous damage to U.S. negotiating credibility. Chinese, European and Japanese negotiators will be even less eager to conclude new trade agreements with this White House than they were before.
What is perhaps most distressing about this litany of economic and political costs, besides the vanishingly small benefits, is that the endgame remains a mystery. Does Trump believe what he says about foreigners paying the tariffs? Or that uncertainty is good because it will encourage firms to bring manufacturing activity back to the United States? Does he simply thrive on chaos and confrontation without regard to the consequences? Is it politics, pure and simple—or ignorance, stupidity and personal ambition?
Whatever it is, ordinary Americans—as well as Mexicans, Central Americans and others around the world—are paying the price.
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