Trump’s tariffs are spooking markets while the economy slows

President Trump certainly likes to twist the markets around his finger. This week the president suggested he might delay a trade deal with China until after the 2020 election. The Dow instantly fell 350 points.

Wall Street is understandably jittery about the state of U.S.-China relations, since Trump has repeatedly imposed tariffs. But a key date – December 15 – is fast approaching. That’s when the administration is set to impose 15 percent tariffs on $160 billion worth of Chinese imports, including smartphones, toys and other consumer products.

The new tariffs will undoubtedly impact the U.S. economy. And Wall Street would prefer to see a deal. But what’s good for Wall Street is often bad for American workers, and especially for domestic manufacturing. An agreement with Beijing might calm nervous investors. But it could also open new opportunities for multinational corporations to outsource more production to China and other Asian markets. And growing trade with China has already cost 3.4 million U.S. jobs between 2001 and 2017.

Wall Street has self-serving reasons to oppose the tariffs. But U.S. workers and consumers should also be concerned. While the tariffs on steel and aluminum may have helped U.S. producers hurt by China’s overproduction, wider tariffs are starting to hurt the economy — though not for the reasons many analysts claim.

Pundits argue that the Trump tariffs are raising the cost of imports. Realistically, that’s not a significant issue, since inflation remains low. But the tariffs have also unleashed a side effect — driving up the value of the U.S. dollar.

Why is the dollar rising? The tariffs have reduced demand for China’s imports. And that has reduced demand for the foreign currency needed to buy them. As a result, the value of the dollar is rising relative to foreign currencies like China’s yuan.

A rising dollar is a real problem for U.S. manufacturers and farmers, and is now offsetting the impact of the tariffs themselves. The dollar has climbed 10 percent since the tariffs first took effect in March 2018, and has also risen 11 percent against the yuan in the same period. This lowers the cost of imports and raises the cost of U.S. exports — neutralizing the tariffs’ bite and hurting trade overall.

Although the U.S. trade deficit with China declined in 2019, America’s overall trade deficit is actually rising. It’s on pace to increase 5.4 percent in 2019, a 31 percent increase since 2016. 

The dollar’s rise also comes from an ongoing flood of foreign investment pouring into U.S. financial markets. That creates added demand for the dollar. And the Trump tax cuts have spurred greater federal borrowing. The Fed boosted interest rates sharply in the 2016-18 period, further lifting the dollar. But recent rate cuts have not slowed the dollar’s rise, suggesting other factors are more important.

Trump sees himself as a pro-manufacturing president. But he’s overlooking a rising dollar, and his trade negotiations with China are missing the mark. His administration is focused on securing greater intellectual property protection for U.S. firms doing business in China. It’s a valid concern, since U.S. firms operating in China often encounter intellectual property theft and coercive technology transfer policies. But increasing their IP protection will just make China safer for more outsourcing. And that’s the last thing America’s manufacturers and workers want.

There’s urgency here, since U.S. manufacturing appears to be flirting with recession. The Institute for Supply Management (ISM) Index has now contracted for four straight months. And while overall U.S. manufacturing employment has increased slightly in 2019, regional employment has diverged sharply. Manufacturing employment declined significantly between January and September throughout the Midwest and mid-Atlantic, even as it has grown elsewhere. It’s a tale of two manufacturing economies. The recession, if it comes, may start in the battleground states. 

In the broader economy, gross private domestic investment has fallen in the past two quarters. The risk of recession is growing because the only expanding parts of the economy are government and consumer spending, fueled by deficit-financed tax cuts. 

America’s consumers are showing the strain, and borrowing more. Net national savings as a share of GDP fell below 2 percent in the third quarter for the first time since 2011. And estimates for fourth-quarter GDP growth range from only 0.8 to 1.3 percent. More signs of a slowdown have also appeared in the November ADP employment report, which showed surprisingly weak private sector growth of only 67,000 jobs. And manufacturing employment declining for the third month. 

The markets are right to be jittery about the Trump tariffs. The president threatens ever more drastic trade actions while the economy suffers. Meanwhile the single most effective way to reduce America’s trade deficit is to lower the dollar by roughly 25 to 30 percent. 

This could be accomplished through legislative means, particularly the bipartisan Baldwin-Hawley bill introduced earlier this year. That legislation would empower the Federal Reserve to tax foreign purchases of U.S. financial assets in order to lower the dollar to a competitive, trade-balancing level.

Concerns over President Trump’s mercurial China policy are justified. Fiddling with trade policy while the dollar climbs and manufacturing employment falls means overlooking the warning signs flashing red on America’s economic dashboard.

Robert E. Scott is a senior economist with the Economic Policy Institute Policy Center.