Trump’s Trade Disputes Inviting Big Trouble

Just several months ago the threat of a sweeping trade war seemed preposterous, but now it’s worry time for everyone from Wall Street investors to Best Buy shoppers and soybean farmers to auto workers.

The Trump administration has already placed tariffs on billions of dollars worth of steel and other foreign goods, triggering retaliatory sanctions on American products such as pork, maple syrup, ketchup and motorcycles, MarketWatch reported.

The US president is now threatening even more tariffs and that’s upping the ante. The next big battleground could be autos.

“You know, the cars are the big one,” Trump said in an interview with Fox News. “We can talk steel, we talk everything. The big thing is cars.”

Economists warn the worsening trade disputes are inviting big trouble in the second half of 2018, particularly since the White House appears bent on expanding the fight to an ever-increasing number of fronts. First it was China. Then Europe, Canada and Mexico. South Korea and India have also been roped in.

Economists at the investment bank Deutsche Bank estimate a full-blown trade war could shave off 1 percentage point from gross domestic product, the official scoreboard for the economy.

It might not sound like much, but the US has barely grown an average of 2% a year since the Great Recession ended in mid-2009. A trade war could thus cut growth in half, reduce hiring and spur businesses to postpone investments.

“Not quite recession inducing, but clearly moving the risks in that direction,” Deutsche Bank economists Peter Hooper, Matthew Luzzetti and Brett Ryan contend.

Consumers Feeling the Pinch

So far most American consumers have been spared. Retaliatory tariffs on US goods have just gone into effect and it will take awhile for price increases to filter into the broader economy. But price increases are almost certainly coming.

Americans might have to pay more for any product made of steel or aluminum. Cars, trucks and appliances are just some of the more notable ones. Not only would the cost of imported metal cost more, but also Americans producers usually raise prices once they are shielded from foreign competition.

If Trump makes good on his threat to impose tariffs on foreign autos and parts, the cost of buying a new car could rise substantially. Virtually every car made these days includes parts made outside the US.

The auto-buying service AutoWise estimates the cost of top-selling vehicles such as a Toyota Corolla, Honda CR-V or Ford F, -0.99%  F150 could rise by up to $1,000.

Anyone with a pension or 401(k) retirement fund, meanwhile, is already feeling the pinch.

The S&P 500 SPX, -0.49% for instance, has fallen 9% from a record close near the end of January. Retired Americans or those close to retirement have a lot less in their accounts than they did at the start of the year.

IMF Warns

The International Monetary Fund warned Tuesday that the Trump administration's recent trade policies could derail growth.

“Directors raised significant concerns over recent trade policy proposals that could have damaging effects beyond the US economy, trigger retaliatory responses, and undermine the open, fair, rules-based multilateral trading system,” the organization said in a statement.

Officials pointed to rising public debt, already at $21.2 trillion and set to outpace gross domestic product after last year's tax cuts, and trade tensions as challenges to what could be the longest economic expansion in US history.

Opposite Effect

The president and his advisers have repeatedly said they don’t think trade tensions will linger all that long or harm the economy. Trump argues that ramping up the pressure is the only way to get other countries to negotiate in good faith and offer the US fairer trading terms.

Yet his actions have arguably had the opposite effect: Instead of forcing China and other countries to negotiate more seriously, they don’t want to be seen as caving in to US pressure. It may be harder to reach deals favorable to the US unless Trump takes a more conciliatory if firm approach.

Threat of Trade War

Arthur Laffer, a former economic adviser to President Ronald Reagan and to Donald Trump’s campaign, said the threat of a global trade was hanging over the US economy and could undo the pro-growth policies that Trump has championed.

“I don’t think we’re going to have a trade war, but if we did, it would be horrible,” Laffer told Bloomberg Television in an interview Tuesday. “We’ve got all sorts of things going for us and the only thing blocking is the threat of trade war.”

Laffer, perhaps best known for his “Laffer Curve” principle of supply-side economics that argues tax cuts help pay for themselves by spurring growth, said “no economist in his right mind would ever want a trade war.”

Trump has imposed 25% and 10% tariffs on imported steel and aluminum and threatened to slap more levies on other products from some of its biggest trading partners.

Tariffs on $34 billion in Chinese goods are set to go into effect Friday. The other nations have vowed to retaliate in what would amount to a trade war that could raise prices and slow the global expansion.