While nearly everybody is happy to see reduced tensions between the U.S. and China over trade, new questions are being raised by many in the media regarding what the current deal means and what are the longer-term costs of the recent battle.
The administration claims that the current deal “promises” to double U.S. exports to China and sees a “two-year spending spree on everything from airplanes to pork chops and chicken feet.”
Still, Bloomberg argues that the “inescapable reality” is that even this extraordinary splurge – if it happens – may not make up the economic cost of the trade war it seeks to defuse.
Not surprisingly, the report says what everybody knows – that “the precise toll of an economic conflict that is far from over is difficult to isolate.”
Currently, however, economists are busily calculating the impact of the fight and notes that most U.S. tariffs will remain in place. These, along with China’s retaliatory measures, along with the impact of the resulting uncertainty – range from 0.3% to 0.7% of real gross domestic product this year alone.
But even with the phase-one trade deal, many economists expect the “tariff drag” to extend for years and to continue to “stymie business investment” and to take a toll on future growth.
While a few tenths of a percentage point may not seem like much, it’s consequential in the world’s biggest economy. In 2019 dollars, Bloomberg estimates the cost in lost U.S. GDP has reached $134 billion to date and will rise to a total of $316 billion by the end of 2020.
Bloomberg also cites a study by researchers at the New York Fed and Princeton and Columbia universities who estimated the cost to consumers of the tariffs that will remain in place at $831 per household per year – with “an annual cost of more than $106 billion for the U.S. economy as a whole.”
That alone could more than wipe out the gains from the Chinese buying surge the administration says has been negotiated, Bloomberg says.
The report says that the costs are also “not one-time” and are likely to build up for years “even as businesses get used to the tariffs, or to adjusted supply chains.” For example, the International Monetary Fund’s estimates are that the U.S. tariffs will subtract from real GDP in every year to 2023, when real GDP will be 0.5% lower than it would have been had the duties not been imposed.
The administration and its supporters argue they are “in a bigger fight to address longstanding American complaints regarding Chinese investment policies” and that the current agreements “will be to the long-term benefit of U.S. businesses and workers,” but that has been a difficult argument to make on the basis of the Phase One deal, critics say.
The administration also points to a U.S. economy growing faster than its peers and continuing to generate jobs as vindication of its trade policies, and expect today’s report to confirm the U.S. economy grew at a 2.1% annualized rate – or perhaps better – in the third quarter.
Larry Kudlow, the head of the administration’s National Economic Council, this week said he expected the combination of the deal with China and the imminent Congressional passage of an update of the North American Free Trade Agreement will mean an addition of 0.5% to U.S. growth – but didn’t release any details regarding the White House analysis.
A challenge facing critics of Trump’s trade policies is the fact that the economic effects of recent trade fights have been largely countered by strong national-level data and a robust economy, driven by domestic consumption that largely offsets negative trade impacts on the manufacturing and farm sectors, Bloomberg says.
Still, the negative effects are real, argues economist Mark Zandi, chief economist at Moody’s Analytics and others.
From the third quarter of 2018 to the same quarter this year – the period in which the trade war really started to bite – Zandi calculates the U.S. lost 0.4% of real GDP to various trade measure impacts, or $88 billion. It also lost 340,000 jobs to the trade wars, he contends, via a mix of stalled investment and higher costs due to new import duties.
The uncertainty affecting business decisions isn’t evaporating, Zandi thinks, and “that will continue to weigh on business investment, hiring and wage growth and will have continued negative consequences for the economy.”
So, we will see. Skeptics of the administration trade objectives have been increasingly vocal recently, across most economic sectors. These intense debates likely will continue and should be watched closely by producers as they evolve, Washington Insider believes
Welcome
