Who the hell cares about a trade war?
You, dear reader. Or at least you should, despite the bloviations of the presumptive Republican presidential nominee.
Usually, when making reckless threats about the economic furor he’ll unleash upon China, Mexico and other major U.S. trading partners, Donald Trump claims they’ll all cower helplessly in terror in response. Such a skilled negotiator is he that no country would dare retaliate. Hence, in the battle to Make America Great Again, no trade war will ever materialize.
But at his first campaign rally in almost two weeks, Trump also offered another, slightly different justification for his hot-headed comments. A hedge, if you will.
As usual, he savaged our current trade deals, calling them “disgusting, the absolute worst ever negotiated by any country in the world.” As usual, he said that China and other countries are “killing us,” that we are “viewed as the stupid country.” And, as usual, he pledged to slap gigantic tariffs on products manufactured abroad. Such measures, he promised, would deter further offshoring, bring jobs back and make the rest of the world “behave” and “respect” us.
But he added one additional argument. Rather than just assuming away the possibility of a trade war, he suggested it would be no big deal if one erupted.
“These dummies say, ‘Oh, that’s a trade war.’ Trade war? We’re losing $500 billion in trade with China. Who the hell cares if there’s a trade war?”
Let’s take his question at face value. What’s so terrible about a trade war?
Plenty, for both us and our trading partners.
As my Post colleague Jim Tankersley reported in March, Moody’s Analytics has modeled the consequences of the specific trade policies Trump advocates. These include a 45 percent tariff on Chinese imports and a 35 percent tariff on Mexican imports.
Trump is right that China and Mexico should fear tariffs of this magnitude: They would indeed throw both countries into recession, according to the Moody’s model. Unfortunately, the resulting damage would drag us down with them, and within a year the United States would probably tumble into recession.
Here’s why.
If other countries choose to retaliate — or “punch back,” in the Trumpian vernacular — by introducing tariffs of their own, our own exports will get more expensive to buyers abroad. If our exports get more expensive, the employment of millions of workers in export-supporting industries becomes endangered, too. As exportdependent businesses shed workers, those businesses and their newly laid-off workers will have less money to spend, causing knock-on effects throughout the economy.
A downward spiral would result, leading to about 7 million fewer American jobs than there would be in the absence of Trump’s machismo-driven trade policy.
Even if Mexico and China for some reason chose not to levy retaliatory tariffs, mind you, Trump’s policies would still batter the U.S. economy. That’s because tariffs here — just like any other taxes — are not costless.
If we levy new tariffs on Mexican and Chinese imports, those imported products become more expensive to U.S. consumers. Which means Americans have less spending power. Which means they buy less in general, and fewer dollars land in the pockets of U.S. retailers and other producers. Which means those U.S. businesses in turn can employ fewer workers.
According to the Moody’s model, if we raise tariffs as Trump desires and there is (astonishingly) no retaliation from abroad, we may not fall into recession, but we’ll still lose out on several million jobs.
What about Trump’s claim that raising tariffs would encourage more companies to move their manufacturing activities to the United States? The likely magnitude of this effect looks small, according to Moody’s calculations, especially if firms believe the tariffs will be temporary. And even if some jobs were reshored, it’s not clear those jobs would be terribly desirable.
Americans romanticize the manufacturing industry because it used to provide stable, middle-class jobs to large numbers of U.S. workers. The kinds of manufacturing jobs available todaylook pretty different, though. A recent report from researchers at the University of California at Berkeley found that about a third of families of front-line manufacturing workers receive some form of public assistance because they earn so little.
Finally, there’s another, scarier reason to fear Trump’s dangerous trade policies. The “capitalist peace” theory posits that commerce and economic interdependence help prevent violent conflict. Or as Frédéric Bastiat is credited with observing (perhaps apocryphally), when goods don’t cross borders, soldiers will.
In other words: It’s not called a trade “war” for nothing.
