Trump’s tariff increase menaces strong economy

Associated Press

WASHINGTON

What trade war?

For months, the U.S. economy has shrugged and chugged along as America and China slapped tariffs on tens of billions of dollars of each other’s goods in the fiercest trade fight since the 1930s.

Growth was steady. The unemployment rate dropped to 3.6 percent, a 50-year low. Stocks soared to record levels.

But President Donald Trump’s decision to hike import taxes on $200 billion worth of Chinese imports from 10 percent to 25 percent could upend all that.

“A game changer,” Steven Cochrane, chief Asia-Pacific economist at Moody’s Analytics, said of the tariffs slated to take effect at 12:01 a.m. Friday. He called the move a “worst-case scenario” that after one year will slash 1.8 percentage points from U.S. economic growth, which was a healthy 2.9 percent last year. (And it could get worse. Trump has threatened to extend 25 percent tariffs to another $325 billion in imports, covering everything China ships to the United States.)

Other economists saw milder consequences.

“The new tariffs will drive up prices on a broad range of American goods, although the overall impact on[ economic] growth and inflation is likely to be modest,” said Eswar Prasad, an economist at Cornell University. That’s because the United States, with a huge domestic market, is far less dependent on trade than most countries.

“A bigger concern is the escalation of the trade war will dampen business sentiment, which in turn would negatively affect investment and long-term growth,” Prasad said.

Whatever pain it won’t be distributed evenly.

Companies that depend on Chinese imports are especially vulnerable. These include tech companies from Apple, which manufactures its flagship iPhone in China to tiny startups just bringing new products to market to midsize companies that have had to absorb existing tariffs as they compete with Chinese rivals.

The higher duties also would cover thousands of other Chinese imports from refrigerators, air conditioners and washing machines to bamboo mats, microphones and cigarette paper. Also on the hit list: infrastructure equipment, components related to the new “5G” wireless networks, semiconductors used in electronic devices, and data center components that are the meat, bones, hearts and brains of many tech products.

Some companies are starting to change manufacturing operations, not renewing leases in China; moving to Malaysia, Mexico and elsewhere, which presents a host of new challenges, including having to hire and train people in a new country.

That kind of uncertainty paralyzes business decision-making and drains economic output.

Retaliation from China is another worry. The official Xinhua news agency reported Wednesday the Chinese government is threatening “to take necessary countermeasures” in response to a tariff hike. China responded to earlier U.S. tariffs by targeting $110 billion in American imports, including American distillers, lobster fishermen, but specifically soybeans and other farm products in a direct shot at Trump supporters in the U.S. Farm Belt.

Hit by sanctions, U.S. soybean exports to China plunged 74% last year.

The trade war has pushed the price of soybeans and other farm products lower.

Randy Richards, a farmer in Hope, North Dakota, and member of a local bank board, said many farmers can’t pay for day-to-day operations so they’re borrowing more money, carrying a larger debt load and paying more interest. “How it affects me and how it affects my neighbors is everybody’s pushing the limit on what they can afford to borrow,” Richards said. “If prices don’t improve we’re going to see more auction sales.”

Bryan Klabunde, a corn and soybean farmer in northwestern Minnesota, said farmers are resilient but the uncertainty over the trade war “is catching up” with them. “I have friends who voted for President Trump and some of those farmers are very frustrated right now,” said Klabunde, vice president of the Minnesota Farmers Union. “The last week and what’s happening with China is putting more stress on them. It’s not only stressful on your financial budget but it’s stressful on your family.”

Economists have actually had to scramble to calculate the impact of rising tariffs. Their skill at analyzing trade wars had grown rusty. Until Trump took office, the global trend had been to ever more open trade, not more tariffs and protectionism. Robert Kudrle, an international trade specialist at the University of Minnesota, said he’s had to explain tariffs to some audiences.

“Tariffs were kind of a thing of the past until a few years ago,” he said. “Now they’re a big deal again.”