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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

How Trump’s Trade Policies Actually Damage the Economy

Economics / Protectionism Dec 29, 2018 - 03:22 PM GMT

By: Patrick_Watson

Economics We have a temporary truce in the trade war.

No one is quite sure if it will last, especially financial markets. After a short-lived rally, they saw little to celebrate in the latest Trump-Xi meeting. 

The US and China have serious disputes. And I think tariffs are the wrong tool to solve them. So I’m not optimistic this break will accomplish much either. We’ll see.


Have you noticed all the war-like metaphors? We talk about trade war, ceasefires, weapons, battlefields, casualties, victory, defeat. The terms seem to fit, at least symbolically.

Trade war isn’t real war. But like real war, it has costs and hurts people, even if it ultimately achieves the goal.

Before we intensify this trade war with China, we should consider those costs.

The Direct Impact of Tariffs

Even pro-tariff people usually acknowledge that tariffs cause economic damage. How much damage is hard to pin down—especially when the policies are complex and change frequently.

However, we’re starting to see estimates.

Economists and think tanks have calculated what damage Trump’s trade policies did to the economy. The answer is, “A lot.”

An ImpactECON study found that, if all of Trump’s current and proposed policies actually happen…
  • US gross domestic product (GDP) in 2019 will be $365.1 billion lower than it otherwise would.
  • The lost production will be $2,357 per household or $915 per person.
  • Some 2.75 million jobs will be lost.
  • Remaining workers will see lower wage growth.   

Another study from the Tax Foundation is somewhat less dire. It thinks the job losses would be smaller and GDP would drop “only” about $125 billion. It also shows how lower-income groups would hurt the most.

Both these studies try to quantify something we can’t know precisely. We know it will be negative, at least initially.

But that’s just the direct tariff impact. There’s more.

Intentional Chaos and Paralysis

One irony in all this: Trump’s tariffs might work better if he weren’t so nice about imposing them.

By “nice,” I mean he gives everyone plenty of warning. He complains, makes threats, and (sometimes) follows through on them, months later. Other times, he decides to forgive and forget.

That’s not an accident.

Trump thinks keeping the opposition mystified gives him negotiating leverage. In the real estate business, it probably did. In government, not so much.

Corporate CEOs and boards can’t just shrug off presidential threats. If it is something that would hurt their business, they have to start preparing. So we get things like the inventory stockpiling that may cause a slowdown next year.

Worse, Trump’s intentional chaos induces paralysis.

Part of the tariff idea is that US manufacturers will begin producing the foreign goods from places like China that don’t compete fairly. But for that to happen, businesses here need to build factories, hire and train new workers, and so on.

Making those investments is foolish when the government policy that justifies them could change at any time. I think that’s one reason we see slower new equipment spending by US businesses.

Better Choices

We know two things.

  • Tariffs are already damaging the economy... but
  • The hoped-for benefits are not yet apparent.

In other words, the costs are certain. The benefits aren’t. And the longer we wait to see if they’ll work, the more the costs add up.

This has real human consequences. Slowing growth and higher prices mean people lose jobs, don’t get raises, can’t afford their medicine. Entrepreneurs can’t raise capital to start businesses.

Slowly but surely, the damage spreads through the economy.

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