The Trade War with China and Lost Economic Growth

By at 10 August, 2019, 8:34 am

by Raymond J. Keating-

In December 2018, President Donald Trump tweeted, “I am a Tariff Man.” In fact, Trump’s pro-tariff stance goes back to the 1980s. However, higher tariffs – like any other tax increases – are bad news for U.S. consumers, entrepreneurs, businesses and workers. Indeed, the anti-growth trade policies of the Trump administration have cost the U.S. in terms of lost economic growth.

Trade is Good – Trade Wars are Not

Trade, of course, is mutually beneficial, whether transactions occur across town, across the country or across international borders. If trade wasn’t beneficial for all parties involved, then they wouldn’t trade in the first place. But rather than looking at trade as being mutually beneficial, as being an economic win-win that generates value and growth, President Trump tends to look at trade as us-vs.-them, as a kind of war. Therefore, it shouldn’t be surprising that he is willing to engage in a trade war. In fact, in a March 2018 tweet, President declared that “trade wars are good, and easy to win.”

In a rather strikingly short period of time, the U.S. has turned away from a generally pro-free-trade stance taken since at least the end of World War II. President George W. Bush arguably was the most productive president in advancing free trade by signing into law nine free trade deals covering a total of 14 nations and also negotiating another three agreements that eventually became law during the Obama administration.

President Bush was the last free-trade president. Other than eventually signing the last three trade deals from Bush, President Barack Obama, who ran for president in 2008 as a protectionist, sat on the trade sidelines. Late in his administration, he got to work negotiating the Trans-Pacific Partnership (TPP) trade accord with 11 Asia-Pacific countries, but that came far too late, and the TPP was discarded by President Trump in his first day in office. President Trump has adopted a largely pro-tariff, anti-free-trade stance.

Trade War Escalation

In the latest salvo, the U.S. trade war with China was further ratcheted up on August 1, 2019, when President Trump declared his intention to impose additional tariffs on imports from China as of September 1. And then on August 5, the Treasury Department labeled China a currency manipulator.

All of this followed on a 10 percent tariff being imposed on $200 billion of Chinese imports in September 2018. These tariffs were mainly imposed on intermediate inputs and capital goods, thereby raising costs for U.S. businesses, including small firms.

Naturally, China retaliated, which eliminated or reduced opportunities for U.S. exporters. The 10 percent U.S. tariff was increased to 25 percent in May 2019, and China retaliated, while also reducing tariffs on goods imported from nations other than the U.S. That magnified the ills for U.S. businesses and workers in the international market. And then on August 1 came President Trump’s pledge to impose a 10 percent tariff on $300 billion of imports from China – mainly consumer goods, which, of course, are inputs to U.S. retail businesses – as of September 1.

According to the Peterson Institute for International Economics, once these tariffs are imposed, 97 percent of imports from China “will be covered by some type of special tariff,” that is, a higher tax paid for by U.S. consumers and businesses.

As for China being a currency manipulator, whether it is or is not, it pays to keep in mind that nations unfortunately push and prod their currencies in various directions for an assortment of reasons – mostly according to misguided assumptions. Floating exchange rates really are “dirty floats.” U.S. politicians who have long complained about China manipulating its currency aren’t truly upset about the manipulation, they simply want China to manipulate its currency in the manner these U.S. politicians prefer.

Small Business in the Crosshairs

It also must be kept in mind that most businesses involved in trade are small firms. For example, 69 percent of U.S. exporters to China have fewer than 50 workers, and 85 percent of U.S. importers dealing with China have fewer than 50 employees. So, higher barriers to trade mean significant woes for small businesses.

Finally, the costs of imposing and threatening higher tariffs are real and significant. In fact, U.S. economic growth clearly has suffered due to the Obama administration moving to the trade sidelines and then the Trump administration carving out an anti-free-trade position.

Consider, for example, that from 1980 to 2017, real U.S. exports grew at a real annual rate of 5.4 percent and imports by 6.1 percent. But from the start of 2018 through the second quarter of 2019, real exports grew at a real average annual rate of only 0.1 percent and imports by a meager 1.9 percent.

Meanwhile, from the start of 2018 to mid-2019, real U.S. economic growth has averaged only 2.5 percent – well below the long-run average exceeding 3 percent. Consider that if U.S. trade had grown at its historical average over this period, average real U.S. economic growth likely would have exceeded 3 percent – probably averaging between 3.0 percent and 3.4 percent.

It’s time to reclaim the economic growth lost to misguided trade policies.

What Should Be Done?

As for Congress, it needs to repeal the power it ceded to the president to unilaterally impose tariffs – i.e., without congressional approval. Revenue measures such as tariffs are a legislative duty, not one that should be handed over to this or any other president. Bestowing such power to the executive branch during the Cold War was at best a dubious proposition, and today, it makes no sense whatsoever.

Meanwhile, the Trump administration needs to recognize the ills of protectionism and trade wars, and realign its trade agenda in a pro-growth direction, as has largely been the case with its tax and regulatory policies. Sending mixed messages on trade also undermines the Administration’s important effort of getting Congress to advance USMCA.

Getting back to leading the world in the direction of free trade, that is, reducing governmental barriers to trade so entrepreneurs, small businesses and consumers can seize on economic opportunity and reap great rewards is a critical pursuit on many fronts. This is where and how the Trump Administration needs to be focusing its efforts.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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