Trump Embraces a Trade War, Which Could Undermine Growth

WASHINGTON — After a year of delighting conservatives with tax cuts and regulatory rollbacks, President Donald Trump is finally following through on the type of trade crackdowns that terrify Republican leaders in Congress and many economists. They warn that the trade war Trump appears eager to launch could backfire, sending America and the world into recession.

Trump said Thursday that he would soon levy tariffs on imported steel and aluminum from every foreign country, a move that sent stocks tumbling through the end of the day. On Friday, he ramped up his rhetoric in the face of criticism, saying on Twitter that “trade wars are good, and easy to win.”

Many economists say the opposite: that even the prospect of a trade war will hurt the economic expansion that is underway and that Trump loves to take credit for.

“Industries that buy steel and aluminum, not to mention agricultural exporters, employ many times more people than the industries that the president wants to protect,” said Peter A. Petri, an economist and trade expert at Brandeis University’s International Business School. “Whether we go through with his approach is anyone’s guess, but business investment depends on predictable policy, and relentless chaos takes its toll even if cooler heads prevail on the policies that the president is tweeting about.”

The planned tariffs are stiff: 25 percent for steel and 10 percent for aluminum. They appear likely to buoy domestic investment and, to some degree, job creation in those industries, while raising prices on consumers and squeezing other industries that rely heavily on metals, such as automobile manufacturing and beverage production. They were hailed by labor groups, whose workers have seen their jobs shipped overseas, liberal economists and lawmakers, while criticized by business groups such as the National Retail Federation.

On their own, the tariffs appear unlikely to affect growth or inflation to a great degree, economists said. Trump’s tariffs “would by themselves have only a small macroeconomic impact,” said Mark Zandi, the chief economist at Moody’s Analytics and a vocal critic of Trump’s trade agenda during the campaign. Zandi said they were likely to add not quite 0.1 percentage points to inflation, which is currently hovering just under 2 percent, and to reduce economic growth by only a few hundredths of a percentage point.

What worries many economists, particularly on Wall Street, is the prospect that Trump is set to launch a broader trade war. The national security grounds he is invoking as rationale for the tariffs could provoke swift retaliation from trading partners such as Canada, which will be affected far more by the measures than China will.

“This is likely to escalate trade tensions,” economists at Goldman Sachs wrote Thursday, “particularly as it looks likely to apply to a broad group of countries, including to some allies of the U.S. We expect further disruptive trade developments over the coming months.”

The tariffs could also bring condemnation from the World Trade Organization — and a potentially dramatic showdown if the United States ignores rulings from the group, which has been marginalized by the Trump administration.

If such problems spiral worldwide, Zandi said, “a particularly dark scenario could end in a global trade war. The economic fallout from such a war could be serious, ending in a global recession.”

Other liberal economists caution that such a scenario remains unlikely. “I’d expect some counter-tariffs on our exports, maybe from China on food products” as a result of the tariffs, said Jared Bernstein, a former Obama administration economist who is now at the Center on Budget and Policy Priorities. “You always hear trade war at these moments. That doesn’t mean that’s always wrong, but it usually is.” From the beginning of his insurgent 2016 presidential campaign, Trump has seen “winning” on trade — measured by reducing bilateral trade deficits, particularly with China, the trading partner Trump is most concerned with — as critical for boosting the economy. Reducing trade deficits, he has argued, will work in tandem with lowering taxes and reducing federal regulations, to supercharge growth.

Trump took several steps last year to freeze or roll back regulations, and he signed a $1.5 trillion tax-cut bill in December. He also took initial steps to reorient trade policy, pulling out of the Trans-Pacific Partnership and embarking on a fractious renegotiation of the North American Free Trade Agreement. But while economic growth accelerated, the trade deficit in goods and services widened to $566 billion for the year, the largest amount since 2008. The goods deficit with China hit $375 billion, a record.

The tariffs Trump announced Thursday were his boldest move yet on trade, and a sign of resurgent power in the White House for economic adviser Peter Navarro and Commerce Secretary Wilbur L. Ross Jr., who have long pushed Trump to act more aggressively on trade, which was a signature campaign issue. They were a reminder to the Republican establishment that Trump’s theory of the economy is sometimes at odds with traditional free-market conservatism, for as much as they overlap.

On Thursday, the conservative Wall Street Journal editorial board called the tariffs the “biggest policy blunder of his presidency.” The move is also at odds with a broad and bipartisan swath of previous top White House economists, going back several administrations, who urged Trump in a letter last year “to avoid a policy that would likely incur greater economic and diplomatic costs than any conceivable national security gain.” Jerome H. Powell, the new Federal Reserve chairman appointed by Trump, told Congress on Thursday that “the tariff approach is not the best approach” for trade disputes.

Trump, though, casts himself as protecting an industry he sees as endangered; raw steel production in America remains higher than it was 25 years ago, but it is down dramatically from the 1970s. As he tweeted on Friday: “We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!”

Such rhetoric will likely boost Trump in industrial states such as Ohio and Pennsylvania, which were both key to his 2016 victory. But in the event of a trade war, many of his other base voters could be hurt. Last year, researchers at the Brookings Metropolitan Policy Program reported that small, rural communities would be disproportionately hurt by a trade shock.

They compiled a list of the 10 metro areas most vulnerable to such a shock because of their economic reliance on exports. Those areas were in Indiana, Texas, Louisiana, South Carolina and Alabama — all states Trump carried.