How Donald Trump’s Tariff Policy Could Affect The U.S. Economy And Consumers

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In an effort to prove that the phrase, “Make America Great Again,” is more than an excuse to sell hats (and a billionaire developer to the blue collar masses), President-elect Donald Trump has made it clear that he intends on shaking up U.S. trade policy. To do this, he has floated the idea that he would impose tariffs, which would raise the price of imported goods in an attempt to increase revenue and keep more jobs in the country. This presents a few questions: How would such a change impact the daily lives of American citizens, and what are the risks and rewards that come from this approach?

Trump fervently disagrees with the North American Free Trade Agreement, which the president-elect has called the “worst trade deal” in history. NAFTA, which was drafted in 1987 by Ronald Reagan and signed into law in 1994 by Bill Clinton, allowed for the U.S., Mexico, and Canada to freely trade with each other, as it eliminated nearly all tariffs between the three countries. And, on the surface, it has been an especially fruitful deal between the U.S. and Mexico, as CNN Money reveals that nearly $1.4 billion in products cross the southern border on a daily basis.

Trump previously criticized the NAFTA deal on the campaign trail, a rare sentiment that he shared with Hillary Clinton who, despite it being one of her husband’s key accomplishments, said it has some flaws, but was an evolving issue. Trump also took aim at the Trans-Pacific Partnership, a twelve-country pact that is similar in nature to NAFTA, but with a bigger scope.

The Future Of Trade Under Trump

Trump has also said that he will seek to renegotiate the NAFTA terms with Canada and Mexico and that he will issue a letter of intent to withdraw from TPP on his first day in office. Both of these declarations have been criticized, as the U.S. Chamber of Commerce reported that 6 million jobs rely on trade with Mexico, and Japanese Prime Minister Shinzo Abe said TPP would be meaningless without the U.S.’ involvement.

But one of Trump’s main gripes with our current free trade relationships is that other countries are proving themselves to be more enticing to companies, which in turn ship jobs overseas and ship their product back to America in an effort to cut overhead and pad profits. These, Trump argues, are moves which have gutted the U.S. manufacturing sector.

Trump has already made an impact in the effort to keep jobs within the U.S., though his tactics haven’t been without controversy, and his role in these victories isn’t always clear cut. In November, Trump cut a deal with manufacturer Carrier to keep more than 1,000 jobs in Indiana, which meant to halt their migration to Mexico. And Ford recently announced that it had axed plans to build a $1.6 billion plant in Mexico in favor of a $700 million one in Michigan. Trump also said Sprint was adding 5,000 jobs in the U.S., thanks to what he says is an improved economic climate after his election win.

To pull off the Carrier deal, though, the company was awarded some hefty tax breaks, clocking in at $7 million over the next 10 years, and it still plans on moving some jobs to Mexico. However, the Sprint jobs were already in the works prior to the election.

Trump has also used the power of his Twitter account (which has more than 19 million followers) and a few soft intimidation tactics to get his point across. For instance, he told General Motors straight up that if they don’t keep production factories in the U.S., then he wouldn’t think twice about slapping the auto magnate with a pricey border tax, something he also mentioned to Ford.

To put this into perspective — If Trump’s proposed 35 percent tariff on Ford cars was already in place, the company would have paid $2.8 billion in taxes in 2016, which would have been more than their profits in a quarter.

It stands to reason that losses like that (and those brought by other tariffs, with CNN reporting a possible 10 percent tariff on imported goods and his Chief of Staff Reince Priebus saying he would only go as high as five percent) are not ones that any company could easily absorb without increasing the costs of their products.

Jeff Spross of The Week wrote that this could actually set off a chain reaction, which could impact the economy as a whole:

“Rather than switching to cheaper production, sellers might react to the tariff by just raising prices on American consumers. But foreign investors still want to park money in U.S. assets. So the dollar could actually strengthen, hurting American exports. In the end, maybe you shrink the trade deficit, but shrink GDP along with it.”

For its part, the U.S. has seen healthy GDP (gross domestic product) growth that rose at 2.9 percent in the fourth quarter of 2016, according to the Atlanta Federal Reserve. And this is on top of the third quarter’s growth, which saw GDP rise at 3.5 percent. But negative growth could change the momentum of the economy, leading to job losses and even, eventually, a recession.

China Concerns

The relationship between Trump and China requires special focus. Even before his inauguration, Trump has made waves by communicating with the President of Taiwan, which directly contradicts long established protocols. Trump also tapped two renowned critics of U.S.-China relations to lead his trade team. All of this followed his campaign trail discussion of China as a currency manipulator, and he floated gaudy tariff numbers (45%) on Chinese made products. That’s of particular note since, according to Fox News, China is responsible for 70 percent of the world’s network equipment, cell phones, and laptops.

Unsurprisingly, China has come out and criticized some of Trump’s intentions. In an editorial for the English-language China Daily, a Chinese Ministry of Commerce spokesperson said a trade war between the two countries would benefit no one:

“The new administration should bear in mind that with economic and trade ties between the world’s two largest economies now the closest they have ever been, any move to damage the win-win relationship will only result in a loss for both sides.”

As of November 2016, the U.S. had done $104 billion in export business with China while taking in $423 billion in imported goods for a trade deficit of $319 billion. That last number is the one that is driven a lot of Trump’s attitudes toward our dealings with China and his desire for a new deal, but the size of the impact on both sides should underline how vital it is that these matters move forward with some delicacy. Because no one wants to see the American economy be dealt a blow by a trade war between these two stubborn superpowers.

What Happens Now?

For now, we all have to wait to find out what comes next in terms of concrete policy plans and hard numbers, how those things will be implemented, and how both the market and the economy will react as Donald Trump puts his stamp on global trade and the world economy. It’s very likely that Trump will offer more clarity on these matters in the near future. When that happens, we’ll update this post and break down any hard news that comes out.

Be sure to bookmark this page and check back for updates on Donald Trump’s efforts to reshape U.S. trade policy in his first 100 days in office.