Trump China Tariffs to Meet Headwinds From Own Economic Policies

(Bloomberg) -- U.S. President Donald Trump’s plan to reduce the trade deficit by slapping tariffs on $50 billion of Chinese imports will encounter strong headwinds from his own economic policies.

Trump’s tax cuts are helping buoy the U.S. economy with growth estimated to accelerate to 2.8 percent this year. U.S. consumer sentiment jumped to a 14-year high in March on higher disposable incomes, according to a University of Michigan survey last week. Those tailwinds are seen boosting imports to the fastest pace since 2011 as shoppers open their wallets wider for foreign products.

“Trump’s new protectionist policies are in contradiction with the stimulative fiscal policies driving up the trade deficit,” said David Dollar, a former U.S. Treasury attache in Beijing and now a senior fellow at the Brookings Institution in Washington. “The anticipation of the tax cuts and now the implementation of the cuts are stimulating the U.S. economy at a late point of the cycle so it is natural for the U.S. trade deficit to grow.”

Trump’s announcement of broader tariffs directed specifically at China sent Asian equities tumbling as investors feared an escalating trade war. China called for dialogue, but also announced it would respond to earlier duties on metal exports with its own charges, on about $3 billion of U.S. exports, and said it would pursue legal action at the World Trade Organization.

The U.S. trade shortfall in goods with China surged 8.1 percent during the first year of Trump’s presidency, reaching a record $375 billion, according to Commerce Department data. That stubbornly high deficit is “out of control,” Trump said on Thursday in Washington, and he wanted it to be cut by $100 billion.

The U.S. will impose 25 percent duties on targeted Chinese products to compensate for the harm caused to the American economy from China’s policies, according to a fact sheet released by U.S. trade representative, which promised more detail in the next “several days.”

“The irony is that Trump’s tax cut and the other policies, by increasing the fiscal deficit, lead to a significant increase in the trade deficit,” said Joseph Stiglitz, the Nobel Prize-winning Columbia University, in an interview in Beijing. “What it has to do is to reduce its fiscal deficit, which is the opposite of what Trump has done in December and January.”

The U.S.’s trade deficit is a macroeconomic phenomenon, and lowering it will have to be done using policies to boost production or contain spending, according to Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong.

©2018 Bloomberg L.P.

With assistance from Kevin Hamlin

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