Mid-year Economic Forecast: Trump rocks the boat

Uses tariffs to challenge U.S. trade partners

Last updated on July 2nd, 2019 at 09:08 pm

At the halfway point of President Donald Trump’s second year in office, several metrics show the American economy is performing very well.

The unemployment rate is at 4 percent (even lower in Wisconsin, at 2.8 percent). The U.S. economy added more than 1.2 million jobs during the first half of the year. An Atlanta Federal Reserve analysis forecasts second quarter gross domestic product growth of 3.9 percent, which would be the best quarter for U.S. GDP growth since 2014.

Trump isn’t shy about taking credit for the state of the American economy. He’s quick to point to the $1.5 trillion tax cut he signed into law in December and reduced regulations under his administration as reasons the economy is in such good shape.

But Trump apparently isn’t satisfied with the state of the nation’s economy. Making good on one of his biggest campaign promises, Trump has taken an aggressive stance on trade issues, confronting what he called “bad deals” that are “unfair” to American businesses, workers and farmers.

The U.S. international trade deficit increased from $504.8 billion in 2016 to $568.4 billion in 2017, according to the U.S. Bureau of Economic Analysis. The largest trade deficit is with China. U.S. imports from China exceeded exports to the country by $335.7 billion in 2017 (see graph).

When he ran for president, Trump said he would “Make America Great Again.” One of his main promises was to bring back jobs from overseas with better trade agreements for the United States.

This year, Trump has instituted steel and aluminum tariffs, plus tariffs on billions of dollars of Chinese goods, in an attempt to put pressure on America’s trading partners.

But those trade partners are striking back with retaliatory tariffs that are already causing problems for American businesses. Milwaukee-based Harley-Davidson Inc. said it will shift production of motorcycles for Europe to its international facilities to avoid up to $100 million annually in costs from tariffs applied by the European Union. MillerCoors, which brews much of its beer in Milwaukee, said the steel and aluminum tariffs will cut its profits by $40 million. Missouri-based Mid-Continent Nail Corp. laid off 60 employees in June and warned it could go out of business if it didn’t get relief from the steel tariffs (it is seeking an exemption for its supplier). North Carolina-based musical instrument synthesizer manufacturer Moog said it may have to lay off workers and move production overseas because of tariffs imposed by Trump on Chinese goods.

Trump says Americans need to be willing to endure some short-term pain for long-term gain in the trade war. He has said a trade war will be “easy to win” for the U.S. because it has such a large trade deficit that if it puts up trade barriers, such as tariffs, other countries will be forced to negotiate new trade deals that are more favorable for the U.S. He is also using tariffs to retaliate against China for intellectual property theft.

“We are demanding from foreign countries, friend and foe, fair and reciprocal trade. We have been very much taken advantage of as a country. We’ve lost our companies, we’ve lost our jobs,” Trump said in his recent remarks at the Foxconn groundbreaking ceremony in Mount Pleasant. “I want to level out the playing field. The smart people love it. Some people don’t understand it. But we’re going to be treated fairly.”

However, some are concerned that a trade war actually will not be easy to win and that it will hurt the U.S. economy, possibly bringing the long post-Great Recession expansion period to an end.

To gain insight on the tariffs and the trade issues, BizTimes Milwaukee surveyed three economists: Joseph Daniels, chair of the Economics department at Marquette University, Avik Chakrabarti, associate professor of economics at the University of Wisconsin-Milwaukee and Michael Knetter, an economist who served as an advisor for presidents George H.W. Bush and Bill Clinton, and is now president and chief executive officer of the University of Wisconsin Foundation.


BizTimes: Are we in a trade war? If so, what can we expect?

Daniels: “It is certainly looking like that is the direction we are headed. We can look back at the steel tariffs imposed by President (George W.) Bush in 2002. With striking similarity, these came about from a campaign pledge he had made. In contrast, Canada and Mexico were excluded. A case was brought to the (World Trade Organization), primarily by European nations, and the WTO found in their favor in 2003. The EU proposed retaliatory tariffs on a range of goods that would cause particular harm to certain sectors, as well as political consequences. Because of the potential for an all-out trade war, the steel tariffs were dropped in 2004, after only 19 months. The potential today is much greater as the tariffs are spread more widely and the administration has threatened to counter-retaliate. It is this second phase that I find most disturbing/concerning.”

Knetter: “I don’t know that there is a clear line between what is and is not a ‘trade war.’ I do know that the president is escalating tension with our trading partners by imposing tariffs on many of them. If our tariffs stand and they retaliate, then we are in a trade war. While the president has claimed trade wars are easy to win, I don’t know his definition of ‘winning’ on this one. And by taking on so many different trading partners who are not taking on each other, we run the risk of being an outcast.”

Chakrabarti: “Yes, by all means, we are in a trade war but this time it is different: It is a trade war intended to end all trade wars. In the short run, we should be prepared to brace for some collateral damage to the extent that short-sighted foreign governments will retaliate only to sub-serve their political bases, but the long run outcome will be a win-win situation for the United States, as well as her trading partners.”

BizTimes: President Trump says he is issuing these tariffs because of unfair trade polices by other countries. Does he have a point? What is he talking about? Which countries have the most “unfair” trade policies (from the U.S. point of view)?

Daniels: “All countries, including the U.S., have unfair trade policies in certain sectors. From an overall viewpoint, the emerging and developing countries tend to have the most ‘unfair’ policies. Typically, these countries are allowed by the WTO to give domestic sectors preference. Eventually, the sectors would become competitive and the incomes of workers would rise, increasing both living standards and purchasing power. The problem here occurs when these practices exist in large, emerging economies, such as India and Brazil. Outside producers find that they cannot compete in the protected sectors in these countries with a large population and market. There is some logic behind the policy, but the devil is in the actual practice. China is problematic not only because of their trade practices, but also their sheer size both in production capacity and consumption capacity.”

Knetter: “Many countries have more limitations on trade than we do. A main reason is that developing economies feel a need to give some industries a chance to get started. Others protect some sectors for political reasons, such as steel and autos in Japan and Europe. That feels unfair to U.S. firms in those sectors, of course. They would like unfettered access. But has it served Japan and Europe well to protect those sectors over the long haul? Almost surely not. By protecting steel and autos, they prevent resources from flowing to higher value uses of capital. You can make a good case that the reason the tech sector has flourished in America and almost nowhere else is because we allow market forces to drive resource allocation. If we had kept our capital in heavy manufacturing instead, we would not have the leading-edge tech firms. There is only so much capital to go around.”

Chakrabarti: “President Trump’s warning is credible and his mission is to level the playing field, once and for all. Trump envisions restoring the dignity of the American labor force and the role of the United States of America as the world leader promoting not only free, but fair trade for all as well. China tops the list of countries that have been ‘taking advantage of the United States’ through ‘unfair’ trade policies. As a member of the World Trade Organization, the U.S. pledges a relatively low 3.5 percent applied tariff rate. The comparable rates are 9.9 percent for China and 5.2 percent for the European Union. For some products, the gap is even wider, e.g. for passenger vehicles, the U.S. levies 2.5 percent tariffs, compared to 25 percent in China and 10 percent in the European Union.”

Noteworthy U.S. trading partners – 2017

Source: Bureau of Economic Analysis

BizTimes: Which companies and industries in America will be hurt by the tariffs Trump is applying?

Daniels: “Initially, it will be companies that are big consumers of steel and aluminum. Heavy manufacturing easily comes to mind. We are, however, already hearing reports of rising costs in commercial construction (steel and aluminum) and in residential construction (tariffs on Canadian softwood timber that Trump imposed last year). When other countries retaliate, it will be companies in sectors when there is a domestic competitor and in states where political damage can be inflicted. As an example, Harley-Davidson is an easy target for the EU as they have domestic producers, say BMW, and Wisconsin is a swing state in elections. It inflicts damage on one big producer and in the state of someone like (House Speaker) Paul Ryan. One would think that both the company and the speaker would be lobbying the administration to drop the steel and aluminum tariffs (as was the case with the Bush tariffs).”

Knetter: “I think that will depend on the form of retaliation others adopt. In general, it will be the sectors in which we have competitive advantage, because that’s where you find American exports.”

Chakrabarti: “President Trump’s trade policy, cushioned by his corporate tax reform, is designed not to hurt any American company. Instead, such policies deliver his promise to protect the dignity of the hard-working American labor force. At risk are only the jobs of hardly working, overcompensated, underperforming individuals who are kept on the payroll only to sub-serve the interests of not-working networks across industries; such redundancies have accumulated due to condoned corrupt practices, but cannot be sustained in the long run.”

BizTimes: Will any companies and industries in America benefit from the Trump tariffs? If so, which ones?

Daniels: “Initially, steel and aluminum. So, the states of Pennsylvania, West Virginia and Ohio will benefit. The costs however, will be felt nationally. Another way to put it is that targeted tariffs tend to favor one or only a few companies (recall Trump’s attempt to impose, at Boeing’s request, very high tariffs on Bombardier). Their costs are spread out, though.”

Knetter: “The ones that get relief from foreign competition due to the tariffs.”

Chakrabarti: “Immediate gains will be visible in import competing industries directly benefiting from the most recent tariffs, e.g. steel and aluminum. In the long run, any American company investing the cost savings accruing from President Trump’s corporate tax reforms in sharpening its competitive edges by compensating workers based on performance will benefit from a fair trade policy. For instance, a company like Harley-Davidson fears rising costs of steel and aluminum and higher prices of its motorcycles: The same company’s long-run gains will far outweigh any such anticipation of short-term losses if the right choices are made now by responding rationally to the economic incentives built into the corporate tax reforms. Shipping jobs overseas, yielding to threats of retaliation from desperate foreign governments, can erode such long-term gains.”

BizTimes: Is the Trump trade policy putting the American economy and the global economy at risk of a recession?

Daniels: “I prefer not to answer the question in the context of a recession. It is bad policy, whether it causes a recession or not. We are fortunate that there are very strong tailwinds for both the U.S. economy and for many foreign economies. Of course, everyone wants to credit the tax cut. It is important to recall that tariffs are taxes and Trump has just increased taxes on U.S. companies and consumers. If a tax cut is good, then the logic follows that the introduction of new taxes (tariffs) is bad. When did the GOP start thinking that taxes are good as long as we spread them out over most Americans?”

Knetter: “Yes it is. The Smoot-Hawley tariffs of the 1930s are considered to be a big factor in the Great Depression. Trade policy changes cause large, disruptive and capricious frictions in resource allocation – what gets produced where. That causes unemployment in the short term and enormous uncertainty for companies considering whether and where to expand. Just ask Harley-Davidson.” 

Chakrabarti: “No, President Trump’s policies are clearly designed to place the American economy on a track of unprecedented economic growth which will improve the lives of the working people.”

BizTimes: The U.S. has a trade surplus with Canada. Are you surprised Trump has gotten into a spat with its prime minister over trade?

Daniels: “I am surprised it happened because it is silly. Of course, Canada is not a security threat. Indeed, just the opposite. We not only share a border, but integrated waterways, energy grids, roadways and supply chains. On average, 25 percent of the products shipped from Canada to the U.S. market consist of U.S. inputs or material. I am not surprised, though, as Trump lost the battle on Bombardier tariffs and Canadian Prime Minister (Justin) Trudeau was not only the host and focus of the G7 summit, he and the other leaders did not back down to Trump. Egos became an issue.”

Knetter: “Nothing the president does can be considered a surprise at this point. He is sufficiently unpredictable that the one thing we know is we don’t know what might be coming next.”

Chakrabarti: “No. Whether a foreign country runs a trade deficit or a surplus with the United States of America, negotiations over any distribution of the gains from trade credibly signals President Trump’s commitment to put the American economy first.”

BizTimes: How is Wisconsin’s economy going to be affected by the tariffs?

Daniels: “Being very reliant on manufacturing and agriculture, this is a real threat to our state economy. Manufacturing will be better off than agriculture as the state tax system is favorable to manufacturers and Foxconn construction will give the sector a boost (evident by all the earth moving and construction equipment headed that way).”

Knetter: “It depends on how others retaliate against U.S. actions.” 

Chakrabarti: “In the short run, the export markets of some local companies will be affected by retaliations from foreign governments. In the long run, Wisconsin’s economy is poised to gain significantly from President Trump’s trade policies and corporate tax reforms while the state’s leadership continues to remain business- and worker-friendly. Wisconsin’s unemployment rate is at a record low 2.8 percent. Recent pledges by Foxconn to hire 13,000 workers, place its North American corporate headquarters in nearby Milwaukee, and spend up to $10 billion on the plant, are early signs of an even stronger outlook for the local economy.”

BizTimes: Trade policy aside, how do you think the U.S. economy is doing in general right now? What impact is the federal tax cut having?

Daniels: “The U.S. economy is doing well. Reducing regulations and lowering taxes on corporations generated a great deal of optimism. U.S. companies repatriated a large amount of money, but also increased investment abroad. Of course, stock buybacks reached new levels, as well. The impact on the real economy was not felt in the first quarter, but should be in the second. The negatives are that the tax cuts factor into Fed interest rate increases and we are looking at a massive fiscal deficit. Spending has to be brought under control or else the long-run consequence will be negative.”

Knetter: “The economy has great momentum, due at least in part to reduced regulatory burdens (although trade actions are a form of increased regulatory burden), corporate and personal tax cuts, expectations of greater infrastructure spending, and broad-based global growth. Consumers and producers have higher confidence, which is good for consumption and investment. Escalating trade actions can undermine all of that by raising prices, increasing uncertainty and creating geopolitical tensions that may have other unintended consequences.”

Chakrabarti: “The United States economy is well positioned to experience unprecedented growth. The federal tax cut is fueling the American economy, now in the ninth year of its expansion. Business sentiment and consumer confidence are at their peaks, while the proportion of Americans in their prime working years (25 to 54) who are working is at its highest level since 2008.”  n

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Andrew is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, he is a lifelong resident of the state. He lives in Muskego with his wife, Seng, their son, Zach, and their dog, Hokey. He is an avid sports fan and is a member of the Muskego Athletic Association board of directors.

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