June 21, 2018
An NYT article that touted the strength of the US economy as a defense against the negative effects of a trade war included an assertion from Spencer Dale, the chief economist at BP, that “trade wars won’t sharply curtail economic activity, unless they cause businesses to lose confidence.” Actually, the most immediate effect of the tariffs being touted by Donald Trump is to raise taxes, which would reduce consumption, other things equal.
For example, if Trump imposes a 20 percent tariff on $500 billion of imports from China, this would be a $100 billion annual tax increase (roughly $1 trillion over a 10-year budget horizon or 0.5 percent of GDP). This would be pulling a substantial amount of money out of consumers’ pockets. The lost demand would be offset insofar as it leads to a reduction in the trade deficit, however, there would be little gain if the result were to replace imports from China with imports from Vietnam or other countries. While the prospect of a trade war could have a dampening impact on investment in the longer term, the most immediate impact is likely on consumption.
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