Trade war pain seems more obvious than the potential gain – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise14th May 2019
Perhaps we’ve now shifted from “trade wars are good and easy to win” bit of the US-China dispute to the “no pain, no gain” part of the conflict. Trump White House economic adviser Larry Kudlow said on Sunday that “both sides will pay” by raising tariff barriers. And Sen. Tom Cotton, an Arkansas Republican, said earlier today, “There will be some sacrifices on the part of Americans.”
OK, that’s the pain part. How about the gain? Kudlow added that “the economic consequences are so small but the possible improvement in trade, and exports, and open markets for the United States — this is worthwhile doing.” And Cotton argued that costs for consumers will be worth it as America remains “the world’s largest economy and the world’s largest economic super power … .”
De minimis costs. Small sacrifices. Minor pain. All for the greater good. That’s how the Trump trade policy proponents talk about the raising of trade barriers. But pain nonetheless. Indeed, President Trump still won’t concede even as much as they do, tweeting this morning: “The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China. Some people just don’t get it!” Tariffs are growth drivers, according to the president.
Economists see things a bit differently. Goldman Sachs thinks “further escalation of the trade war could result in a hit to GDP as large as 0.4%,” according to a weekend research note, while UBS warns in The New York Times that if “the remainder of China’s products get hit with a 25% tariff, it could shave up to another full percentage point from GDP.”
De minimis? That’s a subjective analysis. But certainly not nothing. And it’s important to look at things dynamically, not just from a static, accounting based perspective. What happens to markets and business confidence also matters a lot, especially if business and investors adopt the baseline that this conflict risk represents the new status quo rather than a geopolitical event. (Even if tariffs push China manufacturing elsewhere in Asia or even Mexico, the tariffs might eventually follow with the goal of repatriating supply chains back to America as much as possible.)
And what if they are right? This from a GS note late last year (bold by me):
Although the financial markets have largely brought into the view that tariffs are a sideshow in the US macro story, many economists are instinctively more pessimistic. This is probably because we have all learned that tariffs weigh on our standard of living by preventing us from fully exploiting comparative advantage, i.e., by diverting scarce resources into the production of goods we should be importing. And it is tempting to equate a lower long-term living standard with weaker near-term cyclical performance. But this is a fallacy, in our view, because long-term resource allocation and short-term resource utilization are two very different things. In fact, devoting more resources to sectors in which we have no comparative advantage can be quite consistent with a cyclical expansion in the short term, even though it is likely to make us poorer in the long term.
Indeed, the US economy might shake off the tariffs in the near term even as they undercut the longer-term efficiency, capability, and prosperity of the American economy.