U.S. Is First Casualty of Trade War: Tariffs Politically Popular, but Economically Damaging
The Dow Jones Industrial Average plunged by 304 points just after President Trump announced his intent to impose a 10% tariff on $300 billion of Chinese goods imported into the U.S.
Set to begin September 1, these duties are on top of his 2018 tariffs on $200 billion of imports from China. In opposition to sound economic theory and U.S. equity markets, President Trump assumes his actions against Chinese imports will reduce the nation's trade deficit and force some U.S. companies producing in China to move production back to the U.S.
Since enacting tariffs in 2018, the trade deficit has increased by almost 15% from $114 billion in the first quarter (Q1) of 2018 to $130 billion in Q1, 2019.
Contrary to President Trump's goal of reducing the trade deficit, a smaller trade deficit normally accompanies a U.S. recession. For example, in the 2008-09 recession, the trade deficit fell by 52.2% from $180 billion in Q1, 2008 to $86 billion in Q1, 2009. Over the last four decades, the U.S. achieved a trade surplus only twice, 1981 and 1991, both recession years. Thus, a U.S. recession, instead of tariffs, would be a more effective way of reducing the trade deficit.
Furthermore, instead of seeing the trade deficit with China as "bad," Chinese imports have provided U.S. consumers with high quality goods at a low price. At the same time the Chinese return the U.S. consumer dollars spent on Chinese imports by purchasing U.S. Treasury bonds, thus lowering U.S. interest rates.
It is correct that the Chinese have "stolen" U.S. patents and technology. Reducing this is a goal that could and should be pursued, not reducing trade deficit. Targeting the Chinese trade deficit with tariffs will punish U.S. consumers and producers.
But the pain of the tariffs has not been shared uniformly. Since tariffs were enacted, due to retaliation from trading partners, the U.S. export of agricultural goods has fallen by 12.2%. The U.S. market for U.S. agricultural goods and most manufactured products is not big enough for the output of the most productive firms and farmers on the face of the earth.
Furthermore, economic history points to more financial pain for U.S. consumers, manufacturers and farmers as the trade war escalates. When politics and economics collide, economics lose.