President Trump announced via a tweet over the weekend that he would increase tariffs, taxes on international trade, on Chinese goods to 25 percent from the current 10 percent level because trade talks were proceeding “too slowly.” The announcement sparked a selloff in stock market futures Sunday night that has continued into Monday morning.
Contrary to the president’s claim that China has been paying tariffs and that the trade taxes have been “partially responsible for our great economic results,” economists at the Tax Policy Center pointed out that the Chinese government and companies do not pay Trump’s tariffs at all. Instead, the tariffs are paid by American businesses and consumers who buy Chinese products. Even if consumers buy equivalent products made in the US or elsewhere, they will pay higher prices due to decreased competition for finished products and higher prices for raw materials that go into American-made products.
In a rare but in this case unsurprising turn of events, Senate Majority Leader Chuck Schumer (D-N.Y.) is backing President Trump’s China trade policy. Schumer tweeted that the president should “hang tough on China” and urged him, “Don’t back down.”
It is tempting to speculate that Schumer’s accolades for Trump Trade might be intended to lead the president into slowing economic growth ahead of the election, but the New York Democrat has long supported Trump’s tariff war. Last year, Schumer praised Trump’s tough China trade policy but warned against initiating trade wars against US allies.
In reality, Democrat support of free trade policies in an aberration. Bill Clinton signed NAFTA and Barack Obama negotiated the TPP, but Democrats have traditionally supported protectionist trade policies like the ones that President Trump advocates. In fact, Trump appealed to Bernie voters in 2016 by claiming that his views on trade were “very similar” to those of Sanders. The Vermont senator praised Trump for killing the TPP but has since argued that Trump “is identifying the problem correctly but I’m not sure that his particular solution at this moment is exactly the right one.”
In trading on Monday, markets partially recovered from the 500-point drop seen in futures trading on Sunday, but the president’s trade war remains a significant risk for the economy. After a wild ride in trading late last year, markets settled down on expectations that the US and China would work out their differences. That seems less and less likely. China initially considered canceling their upcoming trade mission to the US. They now say that the diplomatic visit will continue but Vice Premier Liu He may not attend the talks as had been previously planned and the large delegation of more than a hundred people may be scaled down.
The Wall Street Journal points out that Trump’s move to increase tariffs during the negotiations after the Chinese have already offered concessions will make it harder to reach a deal. Chinese executives and industrial policy advocates are concerned that their government is giving up too much to Trump.
“Turning the heat on China would only lead to rising nationalist sentiment,” a Chinese regulator told the Journal. “It’s really not conducive to reaching a deal.”
The economy has been the one unequivocal bright spot of the Trump Administration, but the trade war threatens to undermine this strength. The tit-for-tat tariffs are squeezing US exporters such as farmers as well as increasing costs for American manufacturers and consumers. Steel has posted double-digit price increases since the onset of the trade war and consumers are paying more for a variety of goods from cars to appliances and canned goods.
Thus far the economy has proven to be as resilient against the massive Trump tax increases as it was to the Obamacare tax increases of the previous administration. This is partly due to the Trump Administration’s tax reform and deregulatory successes, but it is an open question whether and for how long growth can continue under increasing prices and slowing exports. China is one of America’s largest trading markets, but the tariff war is being waged against other trading partners as well. If trade talks with China falter before the election, it is possible that President Trump’s reelection campaign could be stymied amid rising unemployment and slowing growth.
Originally published on The Resurgent