The following editorial published on May 13 in the Wall Street Journal:
President Donald Trump often cites the stock market as proof of his economic policy success, so let’s hope he was watching the Dow Jones Industrial Average on Monday. The Dow fell 2.38%, and the Nasdaq and Russell 2000 fell even more, on the escalating tariff dispute between the U.S. and China.
Stocks are volatile, but there’s no denying that markets are rising or falling these days in substantial part on the prospects of a U.S.-China trade deal. They fell Friday morning after Trump raised tariffs to 25% on $200 billion in Chinese exports to the U.S., then rose later that day on word that bilateral talks had been “constructive.” Equities fell again Monday when China retaliated with tariffs up to 25% on $60 billion of U.S. goods.
The Dow is now nearly 1300 points lower than it was in January 2018 when Trump began his tariff offensive – despite the best 12 months for economic growth since 2005 and healthy corporate profits.
The stock market isn’t the only measure of economic health, and it can send false signals, but in this case the clear market message is that tariffs will subtract from economic growth.
Regarding China, Americans have been giving Trump the benefit of the doubt that his tariff strategy is intended as leverage to negotiate a better, fairer trading regime. But Trump seems to sincerely believe that tariffs are a free lunch. “The unexpectedly good first quarter 3.2% GDP was greatly helped by tariffs from China. Some people just don’t get it!” Trump tweeted Monday.
But tariffs are taxes that raise the price of Chinese goods for U.S. consumers and producers. They also raise the price of domestic goods that compete with Chinese imports because U.S. producers tend to raise their prices with the competition. This is what happened after Trump raised tariffs on washing machines, as we wrote May 1.
Trump may be pointing to the one percentage point added to GDP in the first quarter due to an increase in net exports (exports less imports) as imports fell. But this came after a surge of imports in the second half of 2018 due to faster U.S. growth and as companies tried to get out ahead of Trump’s potential imposition of higher tariffs. Jobs in U.S. manufacturing, which relies on export markets, surged in 2017 and 2018, but that growth has slowed in recent months as tariff uncertainty has increased.
The ultimate economic cost of tariffs is hard to measure precisely because it extends beyond the tariff rate to the impact of uncertainty on trade and investment decisions. But there’s not an economist we know – White House adviser Peter Navarro doesn’t count – who thinks that tariffs are a net economic benefit.
Don Rissmiller of Strategas Research Partners estimates a hit to GDP this year of “about -0.1% point for every 2 months we go along with the higher China tariff rates, or roughly -0.5% for a year. A little more than half of this is through reduced confidence and lower investment.” That estimate sounds as good as any, unless the trade war gets worse.
Trump may feel this is a price worth paying if it drives a deal that opens China’s market up to fairer rules of trade and investment. But the economic payoff is the deal, not the tariffs that are a deadweight economic loss.