A dizzying, sometimes contradictory blizzard of tweets and statements coming from the White House over the past several days left Wall Street on edge, and economists scratching their heads. President Donald Trump’s numerous proclamations about the economic impact of trade wars and tariffs, they say, range from wrong-headed to flat-out wrong.
“The reason for the trade war keep shifting,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “In order to leave those facts aside and keep the story going, the rhetoric keeps changing,” she said. “Because it’s not really based on facts and evidence… the narrative shifts.”
Economists and trade analysts highlighted several assertions that don’t stand up to scrutiny.
China trade ban
Trump claimed on Friday that he could declare a national emergency and force American companies to stop doing business with China entirely. The reality is far less certain, experts say.
“The problem with this approach would be political, not legal. This would be hugely disruptive to American workers and firms,” said David Dollar, a senior fellow at the Brookings Institution. “As the U.S. tries to isolate China, small amounts of production can shift to Vietnam, Indonesia, Mexico and other developing economies, but all of these are small compared to China,” he said. “Large shifts are going to be difficult and costly.”
The only certainty would be an economic fallout, perhaps unprecedented in scope.
“The president could well call an emergency and ‘order’ companies to stop business with China, but it would be litigated for a long time,” said Peter Petri, a professor of international finance at the Brandeis International Business School. “Presidential orders to stop doing business with China could well erase all of the progress that the U.S. economy has made in recent years.”
The complex nature of global supply chains means that many companies would be left scrambling to find alternate sources. For highly specialized manufacturing such as electronics and medical devices, there might be no safe or functional substitute, said Michael O. Moore, a professor of economics and international affairs at George Washington University. Tearing up existing supply chains would likely lead to lower quality, higher costs or both, he said.
“On clothing, on toys, it would be hard to find another alternate source,” he said. “If a manufacturer has set up a supply chain where the particular input is coming from China and… spent a lot of time getting their quality right and getting their supply chain organized in a certain way, you can’t just move that.”
Trump harped on a favorite topic last week with his references to bringing manufacturing “home.” In reality, the United States doesn’t have the kinds of factories, supply chains, infrastructure or labor to replicate the vast majority of what American companies import. And even American manufacturers don’t have domestic options for many of the components or inputs they source from China.
For instance, Petri said, “Where will U.S. automakers get thousands of Chinese-made parts?” For a company like Apple, which relies heavily on China for manufacturing, trying to rebuild from scratch without China could literally take decades, he said.
A lack of slack in the labor market and in productivity data suggests that American companies couldn’t quickly absorb a huge surge in demand even if they wanted to. “The U.S. is already operating near full capacity, so for a lot of manufacturing production to shift back here would require other sectors to contract. It will be a lot of disruption that in the end leaves America poorer,” Dollar said.
Paying for tariffs
Trump has repeatedly asserted that China is paying for the tariffs, but economists push back on that.
“In practice, that’s not how it works. Obviously, it’s the importers in the U.S. who pay the tariffs. The way that China ‘pays’ is there may be less U.S. demand for Chinese products [but] for the actual payment, it’s the firms in the U.S. that import Chinese goods,” de Bolle said.
Some of those costs are already being passed onto consumers, and market observers say that will increase. New calculations from JPMorgan found that if the new tariffs set to be imposed in September and December take effect as planned, they will cost the average American household around $1,000. Dubravko Lakos-Bujas, head of U.S. equity strategy at JPMorgan, warned in a client note that due to the large amount of consumer products targeted in this tranche of goods, “The expected consumer impact should be larger in the latest round.”
Consumer spending thus far has remained robust, but higher prices on store shelves or a market drop that puts a dent in consumer confidence could prompt Americans to keep their wallets closed, choking off the last remaining source of momentum for the domestic economy. Wells Fargo senior analyst Ike Boruchow warned in a client note on Monday that “tariff dynamics” are one of the factors he predicts will undermine retailers this holiday season. “We believe that the holiday setup this year is actually quite bearish and thus we continue to view our space through a more cautious lens,” he said.
Credit for stock market gains
“My Stock Market gains must be judged from the day after the Election, November 9, 2016, where the Market went up big after the win, and because of the win. Had my opponent won, CRASH!” Trump tweeted on Sunday.
The numbers tell a different story. Markets have risen nearly 10 percent a year since Trump’s election, but Mark Zandi, chief economist at Moody’s Analytics, points out that the rate of growth during Obama’s first term was larger, at 12 percent annually. In addition, recent market volatility — much of which economists attribute to uncertainty regarding protectionist trade policies — has eroded some of those gains. “After lots of ups and downs, it has gone nowhere since January 2018,” Zandi said.
Last week, Trump claimed the “Fake News LameStream Media” was causing a recession. Economists say that’s not how economies work. “No one can talk us into a recession. Recessions happen because there is something fundamentally wrong with the economy or economic policy,” Zandi said.
Conversely, the uncertainty caused by the Trump administration’s trade policies could be the catalyst for a downturn. “Global capital markets are clearly frightened by the president's escalation of the trade war and bond markets anticipate serious recessions,” Petri said.
“I don’t know how a business plans with this kind of reaction at the top,” Moore said. “It must be terrifying.”