29/09/2020

Economic data shows limited damage from tariffs, though it might take years to see full Impact

WASHINGTONFarmers took a big hit. Importers of auto parts, furniture and machinery choked down punishing tariffs. Investment between the worlds two largest economies dropped.Much of the U.S. economy is largely unscathed by two turbulent years of trade war with China, economic indicators show. Yet economic growth is trending near 2% in 2019, well short of the Trump administrations goal of 3%.The U.S. and China are preparing to sign a first-stage trade accord on Wednesday, easing trade tensions and making the tariffs worth it, in the administrations view. The deal protects American innovation and creates a level playing field for our great farmers, ranchers, manufacturers, and entrepreneurs, said
Judd Deere,
a White House spokesman, adding, President Trump protected the American worker and fundamentally changed our relationship with China.
At the same time, most Chinese imports are still subject to U.S. tariffs, and many trade issues remain the subject of sharp disagreement.
China is set to do little more than restore agricultural purchases and offer some nice words on financial services and intellectual property, said
Benn Steil,
the director of international economics at the Council on Foreign Relations. Trump could have had that two years ago without the tariff damage.
And economists warn it could take years for the full consequences to be realized.
People are wanting to wrap this up in a bow and draw lessons and put this behind us, but I really think its way too premature, said
Chad Bown,
senior fellow at the Peterson Institute for International Economics, a nonpartisan policy outfit.
Here is a look at the far-reaching impacts of the trade war.
Agriculture
American farmers took the brunt of the damage, as China largely halted purchases of major U.S. exports like soybeans. Annual U.S. farm exports to China plunged from nearly $25 billion in recent years to below $7 billion at its low point in the 12 months through April 2019.
Farm debt levels last year reached new records, as delinquencies and bankruptcies rose. Bad weather conditions also took a toll.
The damage was tempered to a degree by the U.S. government responding with $28 billion in aid to farmers. The USDA estimated its aid payments will make up one-third of U.S. farm income in 2019. Any fallout for the broader U.S. economy is also limited because few Americansonly about 1%make their living on farms.
Farmers also fretted that trading relations with China they worked hard to secure might never recover. Agricultural purchases are now set to resume under the phase-one trade deal, with a goal of reaching $40 billion to $50 billion a year.
Inflation and Prices
The Trump administrations tariffs on $360 billion of Chinese imports initially focused on machinery and capital goods purchased by businesses, but later expanded to a range of consumer products.
A basket of goods subject to the tariffs, including auto parts, appliances and furniture, has risen in price by about 3% since 2017, compared with a decline of about 1% for core goods. Overall inflation has remained stable; the total consumer-price index rose 2% in the past year.
While Mr. Trump frequently claimed China would pay the tariffs, they have been paid by U.S. importers.
Research by
Alberto Cavallo,
a professor at Harvard University and leading expert on inflation, showed the prices paid by importers for goods with tariffs jumped, meaning Chinese exporters didnt cut their prices or absorb tariffs through currency depreciation.
The burden has mostly fallen on the U.S. importers because a) Chinese exporters have not reduced their U.S. dollar border prices, and b) U.S. importers/retailers have chosen not to pass on to the U.S. consumers most of the additional cost, said Mr. Cavallo, who co-wrote a paper on the economic impact of the tariffs with the chief economist of the International Monetary Fund, as well as economists at the Boston Federal Reserve and the University of Chicago.
Bilateral Trade
After decades of surging commerce between the worlds two largest economies, trade took a sharp step back. U.S. exports to China dropped by nearly $30 billion, while imports from China fell by over $70 billion, for a decline of over $100 billion in trade.
The trade deficit in goods also fell, one of the Trump administrations goals of the policy, but only by $60 billion. In the 12 months through November, that deficit remained at about $360 billion.
We have learned that trade wars generate very large effects on trade flows but smaller effects on trade deficits, said
Gregory Daco,
chief U.S. economist for Oxford Economics, a U.K.-based forecasting and quantitative analysis company.
Falling imports hurt manufacturers in Chinese port cities, putting some small companies out of business, while sending larger suppliers in search of ways to reduce costs or pass them on to American buyers.
The trade war, coupled with a slowing global economy, caused Chinese exports last year to stagnate, a painful contrast to export growth of 10% in 2018.
Investment
Investment in the U.S. economy slumped. Foreign direct investment slowed to nearly a halt in the early part of 2018, and was weak again in mid-2019.
Total investment in the U.S. economy, which includes building structures like new factories or purchasing equipment for those factories, contracted in the second and third quarters of 2019.
Nancy McLernon,
president of the Organization for International Investment, which represents companies making cross-border investments, said international companies in general are more reluctant to invest in the U.S. because of the trade tensions.
Thats bad news, especially when you consider that international companies employ 20% of Americas manufacturing workforce and produce 25% of all U.S. goods exports.
Jobs
Factories in both the U.S. and China suffered amid a slowdown in global trade and investment.
Industrial activity world-wide slumped. U.S. factories have been a weak spot. In the jobs report released Friday, the Labor Department reported U.S. manufacturers shed 12,000 jobs in December.
But most Americans work in fields that have nothing to do with the trade war, and U.S. job gains have been driven by industries like professional services, leisure and hospitality, and health care.
Economic Growth
In early 2018, the Trump administration was taking a victory lap after achieving its goal of growing the economy by 3% a year, or more. In February of that year, the White House forecast that the economy would continue growing over 3% a year in 2018 and 2019, and that the economy would be so strong the Federal Reserve would continue raising interest rates.
Instead, as the trade war wore on, the administration began imploring the Fed to slash interest rates to bolster the economy. The Fed cut rates three times. Even so, the economy has cooled toward 2%.
Other factors slowed the U.S. economy. The boost from the 2017 tax overhaul was beginning to fade. Europes economy faces long-running demographic challenges. A number of major emerging markets like Argentina and Turkey experienced currency crises that dragged down global growth. Overall, global growth in 2019 had its worst year since the financial crisis.
Chinas growth faltered too. After running at nearly 7% in 2017, its economy is predicted by the World Bank to grow less than 6% in 2020, which would be the slowest pace in about three decades.
The trade warwhich called into question the fundamentals of U.S.-China relationskept Chinese business sentiment depressed and ordinary consumers wary. Many businesses put investment and expansion plans on hold and even laid off workers.
Without the trade war, Mr. Daco of Oxford Economics estimates the U.S. would have grown 2.6% last year, and the global economy about 2.9%.
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Exactly how much was lost cant be determined, because no one can know how many factories might otherwise have been opened; how many plans were postponed as executives chased exemptions to tariffs; how many investments would have been made; or how many metric tons of soybeans China might have needed from U.S. buyers.
One thing we learned: Its not just the tariffs and how large they are, said
Ayhan Kose,
director of the World Banks global macroeconomic outlook. It is this type of uncertainty. How the discourse takes place has a huge impact on uncertainty and in turn on activity. It is the constant unpredictability of what happens next.
—Chao Deng and Liyan Qi in Beijing contributed to this article.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
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