Fed chief lays out risks of trade war

Federal Reserve Chairman Jerome Powell told lawmakers Tuesday that mounting trade tensions between the United States and key economic partners could pose serious risks to the U.S. and global economy.

In testimony at the Senate Banking Committee, Powell was cautious in his remarks and tried to avoid commenting directly on President Trump’s policies, even as lawmakers from both parties pressed him on how deeply the U.S. could be harmed in a trade war.

{mosads}Powell said escalating tariffs between the U.S. and others had already stunted business growth even though it was still too early to know the final impact.

“If it results in lower tariffs for everyone, that will be a good thing for the economy,” he said of Trump’s trade policy. 

“If it results in a higher tariffs across a broad range of goods and services that remain that way for a long time, that will be bad for our economy and other economies, too.”

But Powell, a Republican, also defended the global trading system that Trump has sought to upend, and he advocated for the eventual removal of tariffs.

Lawmakers warned Powell about the damage they had already seen inflicted on businesses in their states even as the economy expands and unemployment falls toward historically low levels.

Powell’s testimony comes as the Trump administration is escalating trade fights with China, the European Union, Canada and Mexico.

Lawmakers, business groups and agriculture exporters have expressed worries that Trump’s tariffs on steel, aluminum and Chinese goods — and the retaliation they spur — could cause widespread economic harm.

The Fed chairman, though, touted the strength of the U.S. economy in his opening remarks to the committee, citing a tight labor market, a stable financial system and rising consumer spending driven by higher after-tax income and spiking household optimism.

Even so, Powell and Fed officials have noted recently that U.S. businesses have abandoned expansion plans due to rising costs and growing uncertainty driven by tariffs.

Powell also told NPR’s “Marketplace” last week that the Fed is “hearing a rising level of concern” from U.S. firms about the impact of Trump’s tariffs, which could trigger several “very challenging” economic situations.

Republicans and Democrats from export-dependent states condemned Trump’s trade policy and asked Powell to weigh in on the best path forward for the economy.

Powell insisted that trade issues are not within the bank’s mandate, but he said that high tariffs and trade barriers are typically harmful.

“In general, countries that have remained open to trade, that haven’t erected barriers — including tariffs — have grown faster, they’ve had higher incomes, they’ve had higher productivity,” Powell said, “and countries that have gone in a more protectionist direction have done worse.”

Retaliatory tariffs from other countries are already hitting U.S. businesses, especially agriculture, hard.

The EU, Mexico, Canada and China have targeted agricultural and manufactured goods produced mainly by states that are home to Trump’s electoral base. The retaliatory tariffs they imposed on corn, soybeans, cotton, pork, apples and other major crops could cause severe losses for U.S. farmers.

Powell called the current tensions between the U.S. and its trading partners “unprecedented” and said “an international rules-based system in which countries can get together” has “served us well.” 

Trump has already imposed a 25 percent tariff on imported steel and a 10 percent tariff on aluminum coming into the country for national security reasons, angering close allies.

The U.S. recently hit China with tariffs of $34 billion on their goods, with the expectation that another $16 billion is forthcoming. China immediately punched back with tariffs of $34 billion on U.S. products.

Last week, Trump proposed an additional 10 percent tariff on $200 billion of Chinese goods, and the administration also is threatening to raise the tax on imported autos and auto parts.

The U.S. also filed cases against five trading partners before the World Trade Organization (WTO) on Monday, adding to a slew of legal actions over the administration’s tariffs.

Eight countries, including China, have filed cases at the WTO against the U.S. over the tariffs dispute.

Trump has been highly critical of the WTO and has threatened to pull the U.S. out of the organization dedicated to crafting and enforcing trade rules. Doing so would be a massive blow to decades of work toward lowering trade barriers and syncing international standards.

Trade is also a key political issue for a trio of the Banking panel’s Democrats, who are facing tough reelection bids in states Trump won easily in 2016: Sens. Jon Tester (Mont.), Heidi Heitkamp (N.D.) and Joe Donnelly (Ind.). All three hail from states with economies fueled by agricultural exports that now face retaliatory tariffs triggered by Trump’s policies.

The EU, Mexico, Canada and China have targeted agricultural and manufactured goods produced mainly by states that anchor Trump’s electoral base. The retaliatory tariffs they imposed on corn, soybeans, cotton, pork, apples and other major crops could cause severe losses for thousands of U.S. farmers.

Tester said that if Trump’s tariffs lead to a drop in U.S. grain exports, “there’s going to be a lot of people in family farm agriculture that are going to be put out of business.”

“I’m worried about farmers in my state,” added Donnelly, citing Indiana’s dependence on corn and soybean exports. “It’s already damaged foreign export markets that took decades and decades to build.”

Republicans also fear that a trade war could tank a strong economy and wipe out the effects of last year’s $1.5 trillion tax cut before this November’s midterm elections.

The GOP is banking on record-low unemployment, strong economic growth and rising consumer optimism to defend their congressional majorities.

Sen. Pat Toomey (R-Pa.), a staunch tariff opponent, said the Fed’s report of dying capital expansion plans was “disturbing” and a threat to the economic boost that Republicans sought by slashing tax rates.

Vicki Needham contributed.

Updated at 2:58 p.m.