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
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.
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
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.