Trump Starts a Trade War, but the Path to Success Remains Unclear

WASHINGTON — The United States and China hit each other with punishing tariffs Friday as the two nations tipped into a long-feared trade war that is only expected to escalate.

President Donald Trump has said that trade wars are “easy to win.” Now, as he opens a global skirmish with allies and adversaries alike, the question is whether he has a plan to achieve the results he wants or whether he is heading into a costly and futile clash without resolution.

The president appears to be betting that threatening trading partners like China, the European Union, Mexico and Canada with tariffs will eventually force them to bend to the United States.

His strategy is being buoyed by a strong economy that is giving Trump more latitude to impose tariffs that might otherwise pose too much risk. Job growth was strong in June, according to a new government report, as employers added 213,000 net new jobs and the unemployment rate rose as more people entered the labor market and began looking for work. Manufacturing job growth was particularly robust.

Those numbers are backward-looking, but there is little reason to think that the initial batch of tariffs will knock the entire economy off course. The $34 billion worth of Chinese goods subject to tariffs, and an equivalent retaliation by China, is tiny compared to the $20 trillion U.S. economy. Global stock markets largely shrugged off the trade war Friday.

But the tariffs are still inflicting pain on some in particular industries, including farmers and small manufacturers who have long supported Trump. And with little sign of a negotiated resolution between the United States and China — or any other trading partner — the conflict threatens to escalate, eventually affecting hundreds of billions of dollars of additional products.

“Trump’s soundest argument in his election campaign was that he would not waste American lives and treasure in pointless wars of choice,” Adam Posen, president of the Peterson Institute for International Economics, wrote in March in an op-ed article. “His launching a trade war would prove, however, to be his economic Afghanistan — costly, open-ended, and fruitless.”

On Friday, the Trump administration took its most aggressive step yet as it imposed tariffs on $34 billion worth of Chinese goods, including medical devices and airplane parts, and threatened billions of dollars more in the coming months. The Chinese immediately responded with tariffs on an equal volume of American soybeans, pork, automobiles and other products.

Mexico, Canada and the European Union have similarly retaliated against Trump’s steel and aluminum tariffs and have threatened to push back if the president moves ahead with his threat to place a 20 percent tariff on imported cars and car parts.

The president and his advisers insist that history is on their side and that Trump’s approach will yield better results than years of diplomatic niceties, including bilateral talks with the Chinese, that have produced bad deals for the United States.

“We have the worst trade deals in the world. We lose money with everybody,” Trump said last week. “Every country is calling every day, saying, let’s make a deal, let’s make a deal. It’s going to all work out.”

His approach has garnered support from certain corners of American industry, particularly sectors that have seen significant job losses connected to China’s rise.

“These aren’t the first shots of a new ‘trade war,'” Scott Paul, president of the Alliance for American Manufacturing, which represents steelworkers and manufacturers, said Thursday in a Twitter post. “China’s been conducting a highly effective war on American workers,” Scott said, adding that the “difference now is that we are systematically pushing back.”

But many of Trump’s supporters say they are unsure, exactly, how the trade war will work out, given the escalating threats emanating from the White House and the lack of a clear strategy toward resolving the president’s differences with the United States’ trading partners.

Trump’s steel and aluminum tariffs had barely gone into effect before he upped the ante and threatened auto tariffs on those same allies, pushing trade relations with Europe and Canada to their rockiest point in decades. With China, the president’s advisers have vacillated between asking Beijing to purchase more U.S. products to lower the U.S. trade deficit and pushing for more substantive economic reforms. And talks to revise the North American Free Trade Agreement with Canada and Mexico remain stalled over deep differences with the United States.

If the conflict with China is not resolved soon, Trump has threatened to place tariffs on nearly everything China exports to the United States, in addition to tightening Chinese investments in the U.S. and limiting visas for Chinese citizens. While many supporters describe the president’s bold statements as a negotiating tactic, talks between the Chinese and the United States have faltered for now, with no additional discussions in sight.

“There is no apparent plan,” said Daniel Price, a managing director of Rock Creek Global Advisors, an advisory firm, and a former trade official in the George W. Bush administration. “The administration has given no indication what the off-ramp is or what their objectives are.”

“Trump is treating trade policy as though it were a real estate deal, where the goal is to beat your opponent, step on his throat and humiliate him,” said Daniel Ikenson, director of trade policy studies at the Cato Institute.

Even if it works and nations like China blink, Ikenson said, “the cost to that will be trust in the U.S., and it will encourage other governments to behave this way when their backs are against the wall.”

Many farmers and manufacturers remain staunch supporters of Trump. But their faith is starting to waver as tariffs take effect and they feel the impact of reduced market access and higher costs.

“I would just like the administration to be clear, at least with us, on the goal,” said Jay Hollowell, mayor of Helena-West Helena, Arkansas, an area that produces soybeans, which are now being heavily taxed by China. “Is it to lower trade deficits with other countries like China, or is it to protect American industries?”

“People’s livelihoods are on the line here,” Hollowell added. For now, the current trade measures affect a small portion of the economy and come at a time of economic strength, giving Trump more latitude to take the type of aggressive measures that, in weaker economic times, would provide a drag on the economy much more quickly.

Businesses have been warning for months that tariffs will cause them to scale back on hiring and investment, and pass higher prices on to consumers. But those effects are not evident in the data, so far.

Oxford Economics, for example, calculated that the tariffs with China would shave only 0.1 percent off both U.S. and Chinese gross domestic product in the next two years, though that would rise to 0.3 percent if the Trump administration follows through on threats to expand the tariffs to $200 billion worth of goods.

But tariffs could still cause plenty of trouble in specific sectors and industries, even if the levies do not provide a significant drag on overall economic growth.

For example, soybean futures prices have fallen 15 percent since May 25 in anticipation of the Chinese retaliatory tariffs. With a stiff tax on soybean imports, U.S. farmers will face lower demand from overseas and a hit to their incomes. Those farmers, in turn, would spend less on equipment and materials, which could eventually trickle through to the broader economy.

John Heisdorffer, a soybean grower from Keota, Iowa, and president of the American Soybean Association, said he and others in the industry had spent years trying to develop markets in China that were now being closed with the stroke of a pen. “My son, who farms with me, is going to spend the rest of his lifetime trying to get that back, and that scares the hell out of me,” Heisdorffer said.

The U.S. trade representative said Friday that it would allow U.S. companies to apply for exclusions to the tariffs if the product they need to import is not available outside China, or if the tariffs on it would cause “severe economic harm.”

Some of the products involved in earlier phases of the Trump administration’s trade battles offer evidence of how U.S. consumers may eventually be affected.

In January, the president announced new tariffs on imported washing machines. Since then, the price of laundry equipment is up 10 percent, according to the Bureau of Labor Statistics.

And the administration has either entered or threatened to enter trade wars on multiple fronts at the same time, compounding the risks. A tariff on automobile imports that is in the works, for example, could expand the dollar value of goods the United States places tariffs on by tenfold and set off a new wave of retaliation that endangers companies that export to Europe, Japan, South Korea and elsewhere.

Leaders of the Federal Reserve appear concerned that this overlay of risk in the economy could dampen investment spending, according to minutes of a June policy meeting released Thursday. Fed officials “noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.”

The economy appears strong enough to withstand the relatively moderate tariffs that have been put in place. The question is what will happen if things continue to escalate to eventually encompass hundreds of billions or even trillions of dollars worth of goods.

“If we get up to $1 trillion in the cross hairs, then that means we’re talking about 25 percent of trade in goods,” Ikenson said. “People will begin to notice that.”