Trump Tariff Headwind May Buffet Smooth-Sailing U.S. Economy
Tariffs seen reducing growth as much as 0.2 percentage point
(Bloomberg) -- On a day when U.S. economic tailwinds were highlighted by the new Federal Reserve chairman and evident in several reports, President Donald Trump decided to add a headwind.
Trump said on Thursday the U.S. will impose tariffs of 25 percent on imported steel and 10 percent on aluminum for “a long period of time.” Stocks and Treasury yields tumbled on concern that the move could spark a trade war and hold back the economy, with shares of big exporters such as Boeing Co. and United Technologies Corp. among those hit hard.
On Friday, with stock futures pointing to more declines, Trump downplayed the threat of a trade war.
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he said in a Twitter post. “Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
Economists said the economic fallout depends on the extent of retaliation.
“It’s a really bad idea -- how bad depends on what the the rest of the world does in response,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Trump’s announcement came after data released Thursday morning showed recent tax cuts buoyed Americans’ spending power in January, unemployment claims fell last week to an almost five-decade low and factories expanded in February at the fastest rate since 2004. Over on Capitol Hill, Fed Chairman Jerome Powell reiterated to lawmakers that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” including fiscal policy and demand for U.S. exports.
The tariffs could reduce U.S. growth by as much as 0.2 percentage point this year, and further risk lies in how trading partners respond, Barclays Plc economists said. While a tight job market and tax cuts are likely to keep America’s expansion humming along, the trade tensions could weigh on growth and boost inflation more than desired by Fed policy makers.
Zandi said that while the tariffs alone may have only minimal effects on U.S. growth and inflation, “I can’t imagine the rest of the world is going to stand still for very long. The scenarios you can construct can get pretty dark pretty quickly.”
Imposing tariffs would open a new chapter in the long-running tension between Trump’s growth-boosting policies -- such as tax cuts and reduced regulation -- and his trade and immigration proposals, which economists generally see as restricting growth.
Interest Rates
Higher inflation resulting from tariffs and follow-up actions could also push central bankers to raise interest rates at a faster pace.
“Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world,” New York Fed President William Dudley said in Brazil on Thursday. “If tariffs go up, it will, at the margin, tend to put more upward pressure on prices, and those upward pressure on prices will have to be considered by the monetary authority.”
Trump’s action is likely to be felt in certain industries. One official with an industry group said the steel tariffs would deal a major blow to U.S. factories, which are already struggling to meet demand amid rising supply costs, a shrinking pool of workers and transportation shortages.
“It’s a mistake. It’s a big, big mistake,” Timothy Fiore, chairman of the Institute for Supply Management’s factory survey committee, said by phone on Thursday. “It is going to add so much disruption and cost here. We don’t make a lot of those steels anymore, so you’re going to have to import them anyway.”
Big sectors of the U.S. economy are major steel consumers, and the material is present in consumer goods from cars to appliances and lawn mowers, said Rufus Yerxa, president of the National Foreign Trade Council in Washington, a business group advocating open trade.
Growth Goal
Most economists were already unconvinced that Trump will achieve his goal of sustained 3 percent growth, with the effects of tax cuts fading after an initial boost this year. Analysts surveyed by Bloomberg News see U.S. gross domestic product growing an average 2.7 percent in 2018, up from 2.3 percent last year, before slowing to 2.4 percent in 2019.
The tariffs could boost annual inflation rates by 0.1 percentage point, though “any pass-through to final goods prices is likely to be less than full and come with a lag,” according to Barclays.
It’s still possible that Trump could stop short of implementing the tariffs, or exempt certain steel products or countries from his new policy. After all, the president’s $1.5 trillion tax-cut legislation was aimed at bringing relief to consumers, whereas the import tariffs would end up as a penalty on Americans’ purchases of foreign-made goods, with a full-blown trade war potentially boosting prices of everything from cars to clothing.
The tariffs reverberated around the world. Stock prices for Japanese and South Korean steelmakers tumbled and U.S. allies pushed back. The Australian Industry Group warned that the move may trigger retaliation and a spread of protectionist policies around the globe.
“You may think that it’s protecting jobs in the U.S.,” said Michael Gapen, chief U.S. economist at Barclays, who formerly worked at the Fed. “But if you do create mini trade wars and trade volumes suffer, you may, on net, lose more jobs than you think you’ve saved.”
--With assistance from Katia Dmitrieva Andrew Mayeda and Enda Curran
To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net, Rich Miller in Washington at rmiller28@bloomberg.net.
To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net, Brendan Murray
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