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A Balanced Assessment of the U.S.- China Trade Deal

President Donald Trump has signed Phase One of the U.S.-China trade deal and that’s good news for both countries’ economies. However, our enthusiasm is a bit more balanced than the exuberance expressed by the president’s trade advisor Peter Navarro.
Mr. Navarro published an op-ed in The Wall Street Journal on Tuesday claiming vindication for the president’s trade wars and chiding those who disagreed.
“Why have the gloom-and-doom forecasters been so wrong?” he asks.  The economy is strong, unemployment is very low, and “2.4 million Americans have risen out of poverty.”
“The jarring disconnect between the forecasts and the real Trump economy,” he continues, “would be comical if the policy stakes weren’t so high.”
But as George Mason University economist Don Boudreaux points out in a letter he sent to the Journal in response to the Navarro piece, correlation is not causation.
Most of the good news about the economy is a direct result of Trump’s tax cut legislation and his efforts to reduce burdensome and counterproductive regulations.
It is true that many mid-sized U.S. towns saw their jobs shift to other countries over the past few decades. Navarro argues that tariffs are bringing them back.
Actually, one of the major factors—although not the only one—driving off-shoring was the high corporate tax rate. Prior to tax reform, the U.S. had the highest corporate tax rate in the developed world. Companies were moving their factories offshore, or more recently just “inverting”—i.e., merging with a foreign company and using that country as the new headquarters—to obtain a more competitive tax rate.
By lowering the corporate rate from 35 percent to 21 percent, which is comparable to the European Union, the U.S. became a business destination again.
What Navarro fails to acknowledge is the downside impact tariffs have had on U.S. businesses and families. However, a new paper from Federal Reserve Bank economists has done just that. It’s conclusion:
We find that the 2018 tariffs are associated with relative reductions in manufacturing employment and relative increases in producer prices. For manufacturing employment, a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs.
Even the steel industry, which tariffs were supposed to help, is now struggling.
In addition, while consumer spending has been strong, business investment has been declining for months—a reflection on the uncertainty that the trade war has produced.
While it is probably fair to say that the trade war hasn’t hurt the U.S. economy as much as many predicted, it has clearly been a drag on growth. And Navarro simply ignores that downside.
We’re glad that Phase One is behind us and hope the president and China can move quickly on Phase Two. We think Trump’s goal of a 4 percent GDP growth rate is doable, but only once the trade wars are over.