By now, it is has become a universally accepted "truth" that tariffs and trade wars are bad for economies, at least according to legacy economists and trade experts, Bloomberg recently pointed out. Not only do trade wars make goods and services more expensive due to supply chain disruption, they also invite retaliation and can hurt countless other aspects of an economy. Like any conflict, narrow short-term benefits often come at the expense of longer term concessions.
But increasingly, it’s looking like President Donald Trump may not hold this widely-held "traditional" view on tariffs. As trade pressure has ramped up on China over the last year - and again over the last few days - Trump seems to have increasing confidence in the idea that trade wars are actually boosting US growth and strengthening his hand, according to people familiar cited by Bloomberg.
Furthermore, while it may be good for the US in the short term, trade war's impact on the global economy going forward may be profoundly negative. The 15% increase on import duties on Chinese goods that is proposed for May 10 seems to fit right into what Bloomberg calls Trump's "alternative theory of economics". Trump is also likely feeling empowered by a better than expected GDP print of 3.2% and employment data that shows the US added 263,000 jobs in April.
Trump, in recent tweets, claimed his tariffs “are partially responsible for our great economic results.”
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars....— Donald J. Trump (@realDonaldTrump) May 5, 2019
And there is some truth to his statements. For instance, imports slowed in the first two months of the year, which helped boost the growth rate, thanks to how GDP is calculated. The threat of further tariffs at the beginning of the year this year only caused companies in the US to order goods from China in advance, during the last quarter of 2018. This helped lead to a build up of inventory stockpiles and the narrowing of the trade gap.
Carl Riccadonna, chief U.S. economist for Bloomberg Economics said: "The effect was to make growth appear stronger than meets the eye.”
The headline jobs number may have also had some weaknesses under the surface. For instance, manufacturing employment grew only by 4000 jobs with non-supervisory production jobs declining by 4000 jobs. This metric is inclusive of factory style jobs that Trump has promised to reinvigorate. Steel and aluminum producers lost 2000 jobs in April, showing that industries protected by Trump's tariffs may not be realizing their perceived benefits.
On the other hand, the US economy continues to look healthier than most others around the globe. And the true pain of trade wars can be hard to quantify. It is often said that the pains of free trade are much easier to see because they show up on a local level, whereas the globalized broader benefits, like lower prices, are more diffuse.
Bloomberg economists calculate that a 25% tariff on all imports from China could shave 1.5% off of US growth, a cut that could see GDP at nearly half of its first quarter print. Trump supporters, and likely Trump himself, will argue that the sacrifice is worth it in the context of an existential innovation war with China. Robert Lighthizer, the U.S. trade representative leading the negotiations with Beijing, in advocating for Trump's narrative said: “These are not benign actions that we are objecting to.”
Adam Posen, who leads the pro-trade Peterson Institute for International Economics, said that Trump's mind could change based on the market's reaction or polling results: “The upshot of all this is he’s not going to be deterred by the market in the end. He is not going to be deterred by whether this polls well in Iowa. This is what he genuinely believes—that a mercantilist protectionist trade policy is good for the U.S.”
But that also poses the question: if China blinks first, could Trump's "alternative" view on tariffs wind up becoming the new norm?