Who’s playing into whose hands when it comes to economic warfare? Professor Chowdhury answers the most pressing questions from the trade war.
Abdur Chowdhury is a Professor Emeritus of Economics at Marquette University’s Business School and Chief Economist at Capital Market Consulting. He served as the Chief Economist and Director, Economic Analysis Division for the United Nations Economic Commission for Europe in Geneva, Switzerland from 2003-2007. You can read more about him here.
“No one wants a trade war”
On July 6th of 2018, President Trump announced threats on tariffing $540 billion worth of goods compounded with tariffs worth $34 billion. China responded similarly by matching the tariffs dollar for dollar. This escalation began on March 23rd of 2018, when Trump signed a memorandum under the Section 301 of the Trade Act of 1974, instructing the Office of the United States Trade Representative to place tariffs on $50 billion worth of Chinese goods. Trump explained that the tariffs would be imposed due to unfair Chinese trade policies. China’s Ministry of Commerce stated that the dispute could lead to “the largest trade war in economic history to date,” yet the United States has seen a jump in GDP growth within the last quarter. Today, we have Professor Abdur Chowdhury to help us synthesize and corroborate on the implications of this new trade strategy between the two largest economic superpowers.
RP: What sparked Trump to add recent significant tariffs on China? How unfair have the prior economic policies been to the United States?
AC: President Trump has been saying for a long time that he thinks China is gaining unfairly in its trade with the U.S. It is true that China has taken advantage of a number of areas. However, imposing tariffs on trade is not the answer.
Experts contend that historically, tariffs have been ineffective since enforcement requires more leverage than our executive branch and business powers are capable of delivering.
RP: How has the U.S. response to trade with China shaped our foreign trade policy?
AC: The Trump administration has heralded economic strength as a source of leverage in its quest to force rivals to make concessions to the U.S. on trade. Those talks are entering a new phase, with an understanding with Mexico on the North American Free Trade Agreement (NAFTA) and an agreement to hold off on tariffs against Europe after a Washington visit by European Commission President.
The U.S. and Mexico have agreed on the key sticking points between the two countries that had held up renegotiating of the NAFTA for over a year. The deal still needs approval by the U.S. and Mexican legislatures, and negotiators still hope that Canada will join as well.
Meanwhile, the U.S. and China are making little progress in behind-the-scenes efforts to restart formal trade talks. A trade war with the United States, should one come to pass, would weigh on Chinese economic growth, but it probably would not bring that economy completely to its knees.
The first round of U.S. tariffs has begun to reverberate globally, and the economic effects are likely to become more apparent if they remain in place—and as other countries retaliate. But for many U.S. trading partners, the tariffs may be just one of the many challenges they will face.
RP: Why has China specifically targeted the Midwest sectors of agriculture and automation in its retaliatory tariffs?
AC: China believes that by targeting agricultural products produced in the Midwest they can inflict suffering on Trump’s base. This would be politically costly for Trump. This has turned out to be true as the Trump administration is providing subsidies to the farmers affected by the tariffs.
Recent polls in key Midwest states: Wisconsin, Michigan, and Minnesota suggest only 3 in 10 voters support Trump re-election in 2020; a significant fall in approval in these states. Consequently, a recent study showed that soybean tariffs alone could cause farmers to lose more than $3 billion in the first year.
RP: What does the recent jump in economic growth mean for the United States?
AC: U.S. Real GDP grew at a 4.2% pace during the second quarter. Moreover, the underlying details were even stronger than the headline number, with real final sales surging at a 5.1% annual rate, as inventories were drawn down sharply. While we doubt we will see another 4% GDP number in coming quarters, the economy clearly has strong momentum going into the second half of the year.
Part of the second quarter’s strength comes from efforts to produce and ship products ahead of retaliatory tariffs. The inventory drawdown pulled production ahead and left inventories exceptionally lean throughout the supply chain. Despite a fading boost from fiscal stimulus and rising short-term interest rates, rebuilding inventories should keep output growing at around a 3% pace for the next two quarters.
This conversation is part of our series of expert interviews. Check out our profile about the Israel-Palestinian conflict with Professor Atalia Omer.