The U.S. Could Be the Biggest Loser of the Trade War
The Trump Administration is leading the world into a tariff war over autos, but ironically it could be the United States that suffers most from it.
Nobody wins a trade war. The question is: Who will lose the most as a result it? A study by the International Monetary Fund indicates the biggest loser could be the United States. The IMF estimates that U.S. output would decline by about 0.8 percent one year into the trade war. That would far outstrip the 0.5 percent decline the world economy could expect to suffer over two years. If 0.8 percent sounds puny to you, remember that represents about one-third of all U.S. economic growth last year.
The U.S. economy would be hit hard in two ways by a 25 percent tariff.
First, auto industry jobs would decline. General Motors has said tariffs “could lead to a smaller GM." Increased costs would force the elimination of jobs, plus the tariffs would invite retaliation from other countries that would shrink sales. Jeff Schuster at the research firm LMC Automotive estimates that tariffs could cost the U.S. auto industry at least one million in annual vehicle sales. This would similarly weigh on the employment outlook.
Second, consumers would suffer in concert with the rising cost of cars. The American Automotive Policy Council estimates that a 25 percent tariff (really a tax on consumers) would amount to $83 billion in extra taxes. That goes for domestically-produced cars as well as imports, because the auto industry is characterized by cross-border supply chains, with many parts made elsewhere. The National Automobile Dealers Association estimates that the tariffs would drive up the cost of U.S.-built cars by $2,270, and the cost of imported cars and trucks by $6,875. The European Commission estimates that the same level of tariffs would add 10,000 euros ($11,700 USD) to the sticker price of European-built imports into the U.S.
Despite the huge potential downside of tariff increases, the U.S. trade balance has yet to see any upside. The trade deficit rose 7 percent in June, as exports declined and imports increased – putting the United States on track to post its largest annual trade deficit in 10 years.
No one can say they haven’t been warned.
While there has been a temporary break in the auto trade war between the United States and the EU, the concern among U.S. trading partners is evident. The EU and other auto-producing economies understand the potential impact of a trade war on their respective auto industries, jobs within, and prices. Senior officials from the world’s top car-exporting economies – including the EU, Canada, Japan, Mexico and South Korea – met last Tuesday in Geneva agreed to discuss responses to any new U.S. tariffs on autos and auto parts. Officials said they are considering a number of options, including the imposition of retaliatory tariffs against U.S. goods.
The days when the United States could simply flex its economic muscles and dictate to the rest of the world are long over. Last year, U.S. GDP as a proportion of global GDP came to a little over 24 percent, a half-point drop from 2016. That’s less than half of the estimated 50 percent share of world GDP the United States enjoyed at the end of World War II. The United States does not have the muscle it did in 1945. It cannot simply dictate to its trading partners.
Make no mistake, this shift in U.S. economic predominance is actually a good thing for Americans. The U.S. proportion of the global economy has declined, but the size of the global economy has increased so much that the United States is producing far more goods and services than it ever has. The shift means that other countries have more money to spend on U.S. goods and services, and more opportunity to contribute goods and services that Americans can use. The fact that Chinese workers are keeping down the cost of iPhones and laptops is good news for Americans who buy iPhones and laptops. The fact that China is a major purchaser of planes from the United States is good news for Americans who help make planes.
One thing that can disrupt this positive symbiotic relationship is a trade war. While President Trump may see trade wars as being “good, and easy to win,” they are actually bad for all economies and impossible to win. The best any country can hope for is to lose less than others. Do people want to lose less than the other guy, or do they want to make more than they ever have before?