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The Trump Economy Is Starting To Make Republicans Nervous

The trade war's effect on manufacturing and agriculture threaten Republicans in 2020.

“The economy is doing GREAT,” President Trump gushed on Twitter this morning, adding that there was “tremendous upside potential” if only “the Fed would do what they should.” However, an increasing number of Republicans are seeing Trump’s bullish tweets as an attempt to whistle past the graveyard.

“There’s no question that trade uncertainty is contributing to the slowdown,” Sen. Pat Toomey (R-Pa.) said, quoted in Politico. “We’re in a very good place. The danger is: Where are we going to be a year from now if concerns about trade continue to be an irritant to growth?”

“The biggest risk to the economy is the whole trade situation,” agreed Sen. Ron Johnson (R-Wis.) in an interview. “I think the president did a great job, we stopped doing the regulatory burden, we have a fairer tax system … and the whole trade war has injected a huge dose of uncertainty and instability.”

“I don’t think [White House economic advisor] Peter Navarro understands the instability of what he promotes, [what] his trade war is injecting into the economy,” Johnson added.

At least one Republican, Sen. Chuck Grassley (R-Iowa), has announced his intention to introduce a bill to curb the president’s power to impose national security tariffs this fall. Nevertheless, Grassley stopped short of attacking Trump’s tariffs earlier this month.

One reason that swing state Republicans are concerned is that the bond yield curve inverted again yesterday after flirting with inversions in recent weeks. When the yield on long-term (10-year) bonds is lower than that of shorter-term (2-year) bonds, it is typically seen as a leading indicator for a recession.

The disturbance in the bond and stock markets can be traced directly to the president’s tariff war with China. Over the past few weeks, both sides have launched new rounds of increased trade taxes and the Chinese have suspended purchases of American agricultural products, a direct assault on a core part of Trump’s base that has already been hit hard by the trade war. Even the Trump Administration’s farm subsidies and a new trade agreement in principle with Japan, which may be signed into a formal treaty in September, are unlikely to offset the loss of one of America’s largest agricultural export markets.

Farmers aren’t the only segment of the US economy that is reeling from the trade war. US manufacturing has also been flashing caution lights for several months now. Federal Reserve data from June showed that US manufacturing had already declined for two straight quarters, putting the sector in a recession. Last week, Fortune reported that the situation had gotten even worse with US factory activity contracting for the first time since September 2009. Other countries were also seeing their manufacturing activity decline as the world economy experienced decreased demand, which naturally follows the higher prices of goods traded internationally or built with imported components or materials.  

A further disturbing fact is this morning’s report from White House sources that Trump’s claim of calls from China asking to resume trade talks “didn’t happen the way he said they did.” Per CNN, the officials said Trump was “eager to project optimism that might boost markets, and conflated comments from China’s vice premier with direct communication from the Chinese.”

“What does Pat Toomey want me to do?” Trump reportedly responded this morning to Toomey’s comments. “Does he want me to say ‘Let me put my hands up, China…continue to rip us off? Let me give up right now, China, even though we’re winning?’”

What Trump is actually doing is steering more subsidies to his farm base as well as reaching the new agreement in principle with Japan. Prime Minister Abe said, “We believe that there is a need for us to implement emergency support measures for the Japanese private sector to have the early purchase of the American corn” due to “insect pests” but stopped short of committing to the “hundreds of millions of dollars” in agricultural products that Trump requested.

President Trump also said today on Twitter that he is preparing a “giant package” of aid to farmers who were impacted by both the trade war and the Trump Administration’s waivers to 31 refineries that allow them to not blend corn-based ethanol into their fuels. Even before the ethanol aid, Trump subsidies to farmers have reached $28 billion.  

“The administration has to be prepared to take off the tariffs in order to get a good agreement,” Sen. Rob Portman (R-Ohio), a former U.S. trade representative, recommended. “And there’s been some disagreement about that within the administration. Some are saying they should come off and others are saying we should keep them. I don’t think you’ll get a good agreement if you do that.”

But, to President Trump, removing tariffs without a deal would likely be seen as an admission of defeat and blinking in a moment of confrontation. Back in March, President Trump said that he might not remove tariffs even after a new trade was reached. The president’s only other course of action is “Damn the torpedoes and full speed ahead,” hoping that the faltering Chinese economy causes President Xi to blink before the US election next year.

Not all Republicans are expressing doubts about the trade war, however. Perhaps most surprising among the defenders of Trump’s trade policy is Marco Rubio (R-Fla.), formerly a free trade conservative. Rubio recently argued in support of Trump, saying, “Do I like tariffs as a matter of policy on any given day? No. What other alternatives do you have to rebalance what has now been 30 years of cheating, lying, stealing and unfairness on behalf of the Chinese?”

The difference between Rubio and Toomey, Johnson, and Portman may be in the recent Morning Consult state polls of Trump approval. Trump is breaking even (within the margin of error) in Florida, but deep underwater in Ohio, Pennsylvania, and Wisconsin. None of the four Republicans is up for reelection in 2020, however.

With both the president’s farm-state base and swing state factory workers feeling the pressure of the trade war, Republicans have little choice but to hang on and hope for the best. President Trump’s reelection almost certainly depends on maintaining a stable economy and finding a successful conclusion to the trade war. At this point, both are seeming less and less likely. If the economy takes a turn for the worse, even more Republicans may find themselves in rebellion against Mr. Trump’s trade policy.

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