Trump Trade Plan Could Push U.S. into Recession, Study Says

logoby Bob Davis, WSJ

Imposing stiff tariffs on China and Mexico, as Republican presidential nominee Donald Trump has proposed, could push the U.S. into recession and cost 5 million U.S. jobs, according to a study by the Peterson Institute for International Economics.

The Peterson Institute, a Washington, D.C., think tank that favors free trade, ran three computer simulations of the economic impact of placing 45% tariffs on Chinese goods and 35% tariffs on Mexico’s. Under the most dire outcome, China and Mexico would retaliate with tariffs on U.S. goods and services, U.S. exports and imports would shrink, import prices would rise, stock prices would tumble and investment would plunge, resulting in recession within three years.

The Peterson study looks at the impact down to the county level, finding that Los Angeles County and Chicago’s Cook County would lose the most jobs. Three counties in New York City—Brooklyn, Queens and Manhattan—would also be especially battered. Among the states, Washington state would suffer the largest percentage job decline, followed by Massachusetts and California.

Hillary Clinton’s trade policies would also be costly—though far less so than Mr. Trump’s—the Peterson study said. She would block the Trans-Pacific Partnership, a trade pact negotiated among a dozen Pacific rim nations, including the U.S., Japan and Vietnam, which she had touted as secretary of state. Mr. Trump also opposes the TPP, as do many congressional candidates in this year’s election.

President Barack Obama has made the trade deal, which Peterson estimates could boost the U.S. economy by as much as $130 billion, a priority and wants Congress to pass it in a legislative session after election day.

Critics of TPP say it would undermine many U.S. jobs. The Peterson study says the pact’s benefits would go mainly to skilled workers, adding to income inequality.

”While Clinton’s stated trade policy would be harmful, Trump’s state trade policy would be horribly destructive,” wrote Adam Posen, Peterson’s president. Peterson Institute economists will discuss the study at a lunch on Sept. 22.

Dan DiMicco, a Trump policy adviser and former chief executive of Nucor Steel, dismissed the report as “propaganda” which starts from an “hysterical premise, weaves a false narrative and arrives at a preposterous conclusion.” He said President Ronald Reagan imposed tariffs on Japanese goods and didn’t cause a trade war; rather that pressured Japan into revaluing its currency.
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The Clinton campaign declined to comment on the Peterson study and cited a previous statement by Mrs. Clinton: “I will stop any trade deal that kills jobs or holds down wages—including the Trans-Pacific Partnership.”

Figuring out Donald Trump’s trade policy isn’t simple. He has repeatedly called for imposing high tariffs on China and Mexico, including on Sept. 15, when he said he would hit cars made by Ford Motor Co. in Mexico with 35% tariffs. Mr. Trump said he is trying to make sure Ford doesn’t move more car production to Mexico.

Mr. Trump’s formal policy speeches on trade don’t include the specific tariff proposals. Rather, he threatens to pull out of the North American Free Trade Agreement with Mexico and Canada and to levy unspecified tariffs on China for allegedly manipulating its currency to support Chinese exporters. Where the candidates’ statements vary over time, “we have relied on what views they return to and what their official campaign websites and documents state,” wrote Mr. Posen.

Peter Navarro, another Trump adviser who is an economist at University of California at Irvine, said the tariffs would never be imposed because China and Mexico would revamp their trade positions in talks with a Trump administration first for fear of losing access to the U.S. market. “The whole point of Trump’s trade policy is use the leverage of the U.S.” to get other nations to change their trade policies.

The Peterson study looks at two other possible responses to huge tariff increase, short of a full trade war.

In one, China and Mexico don’t retaliate fully with high tariffs on U.S. goods and services. Instead, they act more selectively. China could bar its state-owned firms from buying U.S. products, sell off—or threaten to sell off—the more than $1 trillion in U.S. treasury securities it owns, and no longer buy U.S. agricultural goods, particularly soybeans, among other possibilities.

Even that more limited retaliation would hurt the U.S., the Peterson study says. Boeing Co. and its suppliers would be battered by the loss of aircraft sales, the study says, resulting in the loss of 179,000 U.S. jobs. Reduced soybean sales would hit farming areas in Mississippi, Missouri, Tennessee and Arkansas.

A third possibility is that a Trump administration quickly backs down after the start of a trade war after one year because of the domestic outcry. The study calls Chinese factory production of iPhones China’s “secret weapon in retaliation.” Cutting off supplies to Apple Inc. would sharply limit iPhone production, empty retail shelves, send iPhone prices skyward and, presumably, prompt a computer backlash

The economic impact from what the Peterson analysts call an “aborted trade war” would still be significant. Domestic employment would fall by 1.3 million jobs, the study estimates. “The real risk, however, is that the initial Trump administration moves could set off an escalatory cycle of retaliation that could prove difficult or impossible to wind down once set in train,” the study says.

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