Most economists still expect the economy to grow by about 3 percent this year, aided by corporate and individual tax cuts as well as higher government spending, and the already low jobless rate to fall toward half-century lows.
But as the president lashes out at the country’s major trading partners, there are mounting worries that Trump’s aggressive diplomatic strategy could ignite a costly global trade conflict.
“The potential for the trade war to have a much bigger impact is significant,” said Torsten Slok, chief international economist for Deutsche Bank Securities. “It’s not only a direct impact on imports and exports, but it can spill over to confidence and also spill over to the stock market.”
In Sintra, Portugal, on Wednesday, the heads of the central banks of the United States, Europe and Japan voiced alarm at the potential impact of protectionism. Federal Reserve Chairman Jerome H. Powell said tthe consequences of all-out commercial conflict could force the Fed to revise its economic forecasts.
“We have a very wide range of contacts in the business world in the United States and around the world, and as we talk to them they continually and increasingly express concern about trade developments,” Powell said, according to Reuters. “For the first time, we are hearing about decisions to postpone investment, postpone hiring, postpone making decisions.”
Trump says that tariffs on products such as solar panels and washing machines are needed to protect American companies from unfair foreign trading partners. Other import levies, he says, are needed on national security grounds to revitalize steel and aluminum mills.
The president threatened this week to escalate his “America First” trade war with additional levies on $450 billion in Chinese products and more than $330 billion in imported autos and related parts.
With the economy arguably in its best condition since the 2008 financial crisis, administration officials say the United States can withstand a trade war. Kevin Hassett, chairman of the president’s Council of Economic Advisers, projects annual economic growth of 3 percent for the next decade.
If the president uses the threat of tariffs to extract more favorable terms from trading partners, the United States will benefit, Hassett said.
Outside the administration, that sunny view is received skeptically. Economists at JPMorgan Chase Bank this week warned clients that “recent announcements from the Trump administration have raised risks that changes in trade policy could be more disruptive than we thought.”
Before moving to overhaul U.S. trade links, the centerpiece of Trump’s economic agenda was last year’s reduction in corporate and individual tax rates. Coupled with a big boost in government spending and relaxed federal budget limits, that policy acted as a fiscal stimulus to the economy.
Tariffs slow the economy by raising the price of imported consumer goods, such as televisions and computers, and the industrial equipment used in factories.
“Could it wipe out the benefits from fiscal stimulus? Yes, absolutely,” said economist Jim O’Sullivan of High-Frequency Economics.
The president has not followed through on all of his trade threats.
But if Trump implements them and puts tariffs on nearly all Chinese imports, as he has threatened, the economy would slow sharply.
Growth would dip to an annual rate of 1.7 percent, little more than half of the president’s goal, and 1.5 million to 2 million Americans would be thrown out of work, according to Mark Zandi, an economist at Moody’s.
The average U.S. household gained an estimated $900 annually from last year’s Republican-authored tax legislation. Widespread tariffs, which make imported goods more expensive, would consume $720 of that amount, he said.
“That does real damage to the economy,” said Zandi, who advised the 2008 presidential campaign of Sen. John McCain (R-Ariz.). “The probability that the trade war goes off the rails is rising.”
In a worst-case scenario involving 25 percent tariffs on the entire range of Chinese imports that Trump has targeted, the nine-year economic expansion would veer into recession, Zandi said.
Tariffs on imported steel and aluminum, which already are rippling through major industries, offer a glimpse of the risks. On Capitol Hill on Wednesday, Commerce Secretary Wilbur Ross was grilled by members ofthe Senate Finance Committee about implementation of the import levies.
The Commerce chief faced criticism of the department’s slow processing of requests by U.S. companies to continue importing foreign metals on a duty-free basis.
Commerce is struggling with a backlog of more than 21,000 applications. Ross told lawmakers that the first 98 decisions, including 42 approvals, were posted on a government website Wednesday.
“American manufacturers are already suffering,” said Sen. Orrin G. Hatch (R-Utah), the panel’s chairman. “The effects have spread throughout the economy.”
At Bish’s Steel Fabrication and Manufacturing in Salt Lake City, which opened its doors in 1945 and specializes in large metal structures for the waste-water industry, “contracts have all but dried up,” Hatch said.
Ross said that by raising the selling price of steel and aluminum, the tariffs have made it profitable for domestic companies to reopen shuttered mills and approve new investments.
Idled metals-making facilities in Illinois, Ohio, South Carolina, Missouri and Kentucky have reopened, while new plants are on the drawing board in Oklahoma, Florida, Missouri and Texas, Ross said.
Measured against the nearly $20 trillion U.S. economy, the trade barriers enacted so far have been limited. Though the president has made threats about trade for months, The first China tariffs — affecting a modest $34 billion in Chinese goods — don’t take effect until July 6.
Wall Street and most Washington analysts remain confident that the president will avoid an economic catastrophe. His escalating tariff threats, they say, are just the bold tactics of a veteran dealmaker.
“I don’t think we’re in a suicide pact on this, so I suspect we’re not going to cause the economies to collapse,” Lloyd Blankfein, chief executive of Goldman Sachs Group, said this week at the Economic Club of New York.
Even if the United States avoids economic pain in the short term, the president’s habitual brinkmanship may be sowing the seeds of bigger problems in the long run, according to Shang-Jin Wei, a professor of business at Columbia University. Trump’s tariffs are alienating major trading partners including traditional U.S. allies and undermining the global trading rules that were written under American leadership.
“Every country now has to live with the U.S. because it is the largest economy in the world,” said Wei, former chief economist at the Asian Development Bank. “But the U.S. as the largest economy is not a permanent feature of the world economy. There will be a time in the future when it will be more important to the U.S. that other countries follow the rules-based system.”