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| - As we have noted for years, President Trump appears to have little understanding of trade and trade policy, even though it is an animating element of his presidency. As the trade war with China has heated up, the president’s itchy Twitter finger has been busy with a fusillade of false or misleading tweets. Whether the president knows these claims are untrue is unclear, but the overall effect is to create a distinct winner-takes-all narrative for his trade policy. Here’s a quick tour through some of the major themes.
The U.S. is a loser
“We have lost 500 Billion Dollars a year, for many years, on Crazy Trade with China. NO MORE!”
— Tweet, May 10, 2019
This is the Rosetta Stone of the president’s trade philosophy — that the United States has been ripped off by other countries for years. It’s a view he expressed in full-page newspaper ads that ran in 1987, though then the main target was Japan.
But Trump consistently gets two things wrong here.
First, he overstates the trade deficit with China. It was $378 billion in 2018, $336 billion in 2017 and $308 billion in 2016. But for Trump, it’s always been $500 billion. Even if one just focuses on trade in goods, the deficit in 2018 was still not $500 billion, but $419 billion.
Given the rise in the trade deficit during his presidency, perhaps one day Trump will be right.
Second, countries do not “lose” money on trade deficits. A trade deficit simply means that people in one country are buying more goods from another country than people in the second country are buying from the first country. No matter what, people are receiving goods in exchange for their money.
Trump often claims that other world leaders say that no previous president has made such an issue of the trade deficit, but that is because they are puzzled by his obsession with the number. The more relevant figure is whether a country’s exports are growing. The Office of the U.S. Trade Representative says U.S. goods exports are up 73 percent since 2008, and all U.S. exports are up 527 percent since 2001.
China hurts U.S. farmers
“Your all time favorite President got tired of waiting for China to help out and start buying from our FARMERS, the greatest anywhere in the World!”
— Tweet, May 10
Here Trump tries to take credit for solving a problem he created. His initial round of tariffs led China to stop purchasing soybeans and other agricultural products from the United States, resulting in steep losses for farmers. So Trump then scrambled to arrange a rescue package.
As of December, the government said, it cut nearly $9.6 billion in checks, including $7.3 billion to soybean farmers, $580 million to pork farmers and $554 million to cotton farmers. The U.S. Department of Agriculture also planned to spend $1.2 billion on purchases of surplus food and provide $200 million for trade promotion work by agriculture export groups. Now the president is talking about assembling another rescue package. (Ironically, one of the largest pork producers, Smithfield Foods, is owned by a Chinese conglomerate — and under pressure, it gave up a purchase contract with the Agriculture Department that had been awarded under the bailout program.)
But lost amid this rhetoric is that China was already a big purchaser of U.S. agricultural products. The trade representative office said that China was the fourth-largest agricultural export market in 2018, worth $9.3 billion. But China had been the largest export market for U.S. farmers in 2017, with $24 billion in exports, before Trump imposed tariffs.
Through December, The Fact Checker estimated that Trump’s tariffs had raised $12 billion, of which $8 billion stemmed from tariffs on Chinese products. But recall that he had authorized $12 billion in payments to help farmers, making it a net loser at the time.
We win, China loses
“If we bought 15 Billion Dollars of Agriculture from our Farmers, far more than China buys now, we would have more than 85 Billion Dollars left over for new Infrastructure, Healthcare, or anything else. China would greatly slow down, and we would automatically speed up!”
— Tweet, May 10
Trump falsely claims the tariffs would raise $100 billion from China. But China does not pay these tariffs. The tariffs — essentially a tax — are generally paid by importers, such as U.S. companies, who in turn pass on most or all of the costs to consumers or producers who may use Chinese materials in their products. (Chinese producers will pay part of the tax if there are fewer goods sold to the United States.)
In today’s interconnected world, if the Chinese economy “greatly” slows down, the U.S. economy would almost certainly suffer.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”
— Tweet, May 14
Trump’s jawboning of the Federal Reserve to lower interest rates is reportedly one of the reasons the Chinese started to drive a harder bargain; they assumed the U.S. economy was more fragile than they realized. Trump’s tariffs almost certainly will lower economic growth and raise inflation, which might put pressure on the Fed to act. But that would not be a “win” for the United States.
“Many companies are leaving China so that they will be more competitive for USA buyers.”
— Tweet, May 14
There is no evidence that this is the case. Few experts thought the two countries would go to the brink like this, and a survey of member companies by the U.S. Chamber of Commerce found that only 6 percent would consider relocating their business because of tariffs.
Tariffs work
“There is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China today. This has been proven recently when only 4 points were paid by the U.S., 21 points by China because China subsidizes product to such a large degree.”
— Tweet, May 13
Trump is quoting from a study by European economists that predicted that a 25-percentage-point increase in tariffs raises U.S. consumer prices on all affected Chinese products by only 4.5 percent on average, while the producer price of Chinese firms declines by 20.5 percent. The study was released in November, using previously released studies from the 1990s, not actual data on prices. But a paper published March 2, by three prominent U.S. economists, found exactly the opposite had happened when actual trade data was studied.
“Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018,” the economists reported. “We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices.”
Another paper, published March 3, found similar results, with the impact heaviest in Republican counties. “We estimate that the U.S. economy has lost $68.8 billion due to higher import prices,” the economists concluded.
“The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China. Some people just don’t get it!”
— Tweet, May 13
Nope. Tariffs reduce economic growth, as even Trump economic adviser Larry Kudlow acknowledged in an interview on “Fox News Sunday” the day before this tweet. He said it would reduce growth by “two-tenths of 1 percent” of the gross domestic product, which translates to $40 billion. Other estimates are bigger — the Trade Partnership has a figure twice as high — which is why the Fed might have to reduce interest rates if the trade war continues.
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