President Donald Trump is gambling that the American economy can stomach even steeper tariffs on China as he heads toward a 2020 re-election bid.
As trade talks between Washington and Beijing started to fall apart this week, the president’s top trade and economic advisers were urging Trump to move forward with the tariffs, set to kick in at 12:01 a.m. on Friday, according to current and former administration officials and close White House advisers. And Trump has appeared resolute this week on the need for tariffs, added two administration officials.
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Wall Street economists warn the strategy could incite a costly trade war and derail the economy just as Trump embarks on his re-election campaign. But Trump and top administration officials feel confident that the tariffs will hurt the Chinese economy more than the United States, ultimately driving China back to the negotiations, according to one person familiar with the talks.
Escalating his trade fight with China is a huge wager for a president who constantly touts the growing economy and surging stock market as evidence of his presidency’s success. At the same time, Trump won election in part by vowing that he would stand up to China on trade and economics in a way that his predecessors never dared.
“I’m different than a lot of people,” Trump told reporters Thursday afternoon, “I happen to think that tariffs for our country are very valuable”
One administration official, who requested anonymity to share internal deliberations, said the White House’s thinking changed when it felt China was backtracking on agreements that Trump officials thought had been settled.
“When it became clear that the Chinese were reversing their commitments, the entire trade team was strongly unified to go forward,” said one administration official. “This is the only course we can take now.”
Trump also wanted the Chinese to know he is unafraid to ramp up the pressure on their economy, despite fluctuations in the stock market this week as anticipation mounted about the looming tariffs.
Close White House advisers say that confronting China plays well politically in the Rust Belt states which lifted Trump to the presidency in 2016, and which he is counting on again in the 2020 election. They say that any hit to the economy caused by the tariffs will be short-lived and unlikely to disrupt the growth those states — including Pennsylvania, Wisconsin and Michigan — have enjoyed in recent years.
But many economists call that wishful thinking. If Trump follows through on his threat to impose 25 percent tariffs on over $500 billion in Chinese exports to the U.S., China could respond with direct price hikes on everything from cell phones to bath soap.
Torsten Slok, chief economist at Deutsche Bank Securities, called the potential new tariffs “relatively modest,” but noted that “really the problem is all the uncertainty with what comes after that.”
“How will the consumer respond if everything they buy at the department store or the big box store suddenly goes up 25 percent in cost?” he said. “What kind of political backlash would come as a result of that? The consequences could be very significant.”
They could be so significant, some economists say, that Trump could be forced into an embarrassing and immediate walk-back.
“Tariffs on all $500 billion in Chinese imports followed by retaliation would be a different order of magnitude of chaos and market reaction and disruption to global supply chains and a really big hit to domestic growth,” said Ian Shepherdson of Pantheon Macroeconomics, an economics research firm. “I imagine Trump would have to walk it back very quickly.”
Economists generally don’t share Trump’s assessment that the United States is doing so well that it could easily withstand the shock of a full-scale trade war with China. Growth hit 3.2 percent in the first quarter — a robust figure that reflects the economy’s ongoing strength — but experts said the numbers were aided by one-time factors like an increase in inventories.
At the White House on Thursday during an event on surprise medical bills, Trump reiterated that the administration was starting the paperwork to impose a 25 percent tariff on all remaining imports from China, up from the current 10 percent tariffs.
“What I’m doing now with China should’ve happened many years ago,” Trump said.
Chinese and U.S. officials on Thursday and Friday are making a last-ditch effort to get their trade talks back on track.
Chinese Vice Premier Liu He was set to begin talks at 5 p.m. with U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and other officials. But if no deal is reached by midnight, the new tariffs will go into effect.
Top officials, including Lighthizer, Mnuchin and Chinese officials are also slated to dine together tonight at Café Milano in Georgetown for a more intimate discussion.
The lone economic effect of the tariffs that does worry the White House is the potential hit to farmers, said two administration officials.
Chinese relation on U.S. agricultural exports, notably soybeans, has already angered farmers in solidly red states, swing states like Iowa and places Trump would like to target next year, like Minnesota. Farm bankruptcies soared across the Midwest in 2018 even as the economy grew around 3 percent. China is the most important trading partner across most of the swing states in the U.S., according to research from Deutsche Bank.
Perhaps the biggest economic and political risk from a full-blown trade war with China is the threat of a sharp increase in consumer prices, which would hit Trump’s blue-collar base especially hard.
“The rest of the list of Chinese goods is full of consumer goods. There is nowhere to hide,” said Shepherdson. “Farmers are exposed, manufacturing would turn down and consumers would take a direct punch to the face.”