Trump’s Tariffs of Abominations: Trade War Consequences for Domestic Industries
By PRANAV RAVIKUMAR | September 22, 2018
Back in April, I wrote an article about the ongoing Sino-American trade war’s economic implications for various countries including Japan, Taiwan, Singapore, and Hong Kong. The trade war is largely the result of President Trump’s insistence that China is implementing what he deems to be “unfair” trade practices such as stealing intellectual property and forcing American firms to hand over their technology. Meanwhile, talks in May to resolve the economic conflict seemed to alleviate pressure but have otherwise ultimately proven to be ineffective in reaching an overarching agreement.
On July 6th, the Trump administration announced a 25 percent tariff on $34 billion worth of Chinese goods, including industrial machinery, medical devices and automobile parts. As China retaliated with tariffs of equal amount, global markets were rattled and an all-out tariff exchange began. With the U.S. announcing an additional 10 percent tariff on $200 billion worth of Chinese imports again in July and more recently a 25 percent tariff on $16 billion worth of goods on August 23rd, tensions between the two economic giants have certainly flared. As a result, Beijing struck back with tariffs of their own and, just this week, scrapped scheduled trade talks with the Trump administration. As the international community grows increasingly worried about this trade war escalating any further, the tariffs which were meant to protect the American economy are instead poised to damage consumer behavior, negatively impact company performances across industries and even slash at the benefits that Trump’s fiscal policies were meant to provide.
President Trump is right to say that the current U.S. economy is in great condition, especially after having achieved a 4.1 percent growth in the second quarter and a near 18-year high in U.S. consumer confidence. With that being said, cracks in the economy are slowly beginning to show, yet, rather than call attention to any economic damage, the President seems set to escalate an already-heated exchange ahead of the November midterm elections. This is seemingly in part due to his desire to sway voter attention away from the political controversies surrounding him, but it is more so due to his adamance that the economy is chugging along perfectly. However, that may not be the case several months down the line. In July, China announced tariffs on U.S. cars and agricultural goods, ranging from soybeans to various meats. If both countries continue to battle it out rather than approach the negotiating table, short-term price hikes across a number of industries such as apparel, cosmetics, electrical machinery, footwear and more are soon to come. The National Retail Foundation has discussed the overall consequences of China’s tariffs on American consumers at length, saying that American consumers will struggle to avoid the ramifications of a trade war as the price of everyday goods will begin to rise. Not only will this obviously change consumer habits, but also this change in consumer behavior will likely be seen during the holiday season, which is just around the corner. While consumers may adjust to the higher prices of inelastic goods, more elastic goods will remain unsold and lead to an oversupply. As companies suddenly introduce heavy discounts to get rid of oversupplied inventory, they will end up eating into their margins and thereby contribute to weakening the American economy.
The U.S. Chamber of Commerce estimates that around 2.6 million jobs will be lost as a result of Trump’s trade policies. Indeed, companies are scaling back their work forces as a result of the tariffs. In early July, the solar panel equipment manufacturer REC Silicon laid off 100 employees as “a direct result of the ongoing solar-trade dispute between China and the US.”. General Motors has sent a critical letter to the Commerce Department as tariffs on imported auto parts will lead to higher car prices and job layoffs at production plants. Volvo has also said that plans to hire 4,000 new employees for a plant in South Carolina may be abandoned due to new tariffs. Trump may have proclaimed that he will “be the greatest jobs producer that God ever created” in his first press conference after defeating Hilary Clinton in 2016, but as of right now this remains the jubilant ramblings of an elated President-elect.
Furthermore, the benefits of Trump’s tax cuts—touted by the President and his staff as being a key factor in stimulating the current American economy—are waning in the wake of his continued trade war with China as well as with separate tariff tit-for-tat exchanges with other countries. Economists across the political spectrum are agreeing that trade wars will have an extremely negative effect on the American economy, with Douglas Holtz-Eakin, a former economic adviser to President George W. Bush, stating that the trade war will be “unambiguously bad”. Mark Zandi, an economist at Moody’s Analytics, estimates the net effects of Trump’s trade conflicts to include 250,000 in lost jobs and $210 in higher costs for an average family. The Tax Foundation, a conservative think-tank, goes a step further and predicts that the U.S. could lose 365,000 jobs in the long run. This is significant when considering that the Foundation gave a favorable analysis of the tax cut bill and reported that it could add 339,000 jobs to the American economy back in December 2017.
All in all, President Trump is attempting to make do on the promises he set forth during the 2016 election: he wishes to strengthen the economy and strike more amenable trade agreements. But if he wishes to truly achieve the “fair trade” he seeks, a cap on the rhetoric and a place to negotiate with Beijing are in order. Until then, disaster seems to be on the horizon.