with Paulina Firozi


Here’s one way to view the short-term economic cost of the tariffs the United States and China have proposed slapping on each other: They could halve the growth effect of last year’s tax cut. 

Which is to say: Not a welcome outcome, but hardly economic Armageddon, either. That’s based on a projection by Ryan Sweet, head of monetary policy research at Moody’s Analytics. He wrote in a Wednesday note that the “tit-for-tat tariffs” the two superpowers have threatened in recent days would shave up to 0.2 percentage points off GDP growth here — or half of what the International Monetary Fund has estimated last year’s tax cuts would add to the expansion this year. “This isn’t enormous,” Sweet noted. 

The threat, of course, is that the penalties each country has rolled out will mark only the opening salvos in an escalating series of reprisals. A lately manic stock market on Wednesday took the other side of that bet. Investors shook off the overnight news that Beijing pledged to match the Trump administration’s $50 billion in proposed tariffs. Instead, they heeded a calming message from President Trump's aides — namely Larry Kudlow, the president’s new top economic adviser — that the fiery words both sides are lobbing across the Pacific will resolve themselves at a negotiating table before they translate into action. 

The stock market’s Wednesday rally belongs in some context. The S&P 500 and the Dow Jones industrial average both remain below where they closed Dec. 22, the day Trump signed the tax package into law. The $1.5 trillion corporate tax cut at the heart of that measure was meant to provide what Trump called “rocket fuel” to the economy. But as The Washington Post’s Philip Bump pointed out this week, a roaring stock market, Trump’s favorite measure of his performance last year, has turned turbulent, in part on fears that the president’s trade agenda will swamp the stimulus that Republicans locked in late last year.  

This is the new normal, per GOP lobbyist Bruce Mehlman: 

Kudlow, a champion of the tax cuts and a cheerleader for the stock market, pulled off some snake-charming in a Wednesday morning media blitz aimed at soothing investors. Asked during a Fox Business Network interview — as stocks were plunging in early trading — if the U.S. is already in a trade war, Kudlow replied, “Absolutely not. Absolutely not.” He urged investors not to “overreact,” and promised a "pot of gold” at the end of the process. Watch him here: 

In an earlier gaggle with reporters, Kudlow arguably gave away the game, suggesting Trump had only leveled the threat of tariffs to force concessions from the Chinese. "You know, there are carrots and sticks in life, but he is ultimately a free trader. He's said that to me, he's said it publicly. So he wants to solve this with the least amount of pain,” Kudlow said

Call it the Chinese finger trap theory: Having locked themselves into mirroring pledges to impose sweeping penalties on the other’s exports, Washington and Beijing both are now incentivized to forge a settlement that averts a disastrous confrontation. That assessment of the situation is gaining some traction. “In our view, despite today’s announcement, China’s policymakers still appear keen to minimize any trade conflicts, for example by adjusting policies on market access, import tariffs on other items, or potentially even its posture toward North Korea or other geopolitical issues,” Goldman Sachs economist Jan Hatzius wrote in a Wednesday note to clients. “It seems probable to us that China will withhold the announced tariff measures until the US’s own tariff hikes take effect (unlikely before June). Chinese authorities will also likely watch closely and respond as needed to the US Treasury’s forthcoming announcement on investment restrictions on Chinese investment (due around late May)."

But the path forward is hardly clear. For one thing, the FT’s Tom Mitchell and Shawn Donnan report, the Chinese are unsure with whom in the Trump administration they should negotiate: 

"Beijing has entrusted vice-premier Liu He, President Xi Jinping’s leading economic adviser and point person for Sino-US relations, with negotiating a settlement that will allow China and the US to back down from imposing punitive tariffs on bilateral trade flows worth about $100bn… But Mr Xi’s most trusted lieutenants have two important questions. Who is Mr Trump’s Liu He, and is Washington really willing to talk?… 

In recent weeks Mr Liu has been communicating with Steven Mnuchin, the US Treasury secretary… in an effort to avoid an all-out trade war. But while Mr Mnuchin remains influential and is widely regarded by Chinese officials as a moderate ‘internationalist’, he has much less influence over day to day trade issues than [U.S. Trade Representative Robert] Lighthizer."

Mitchell and Donnan write that the talks have gotten off to a rocky start. Before a February visit to Washington, Yang Jiechi, China's top diplomat, consulted with Terry Branstad, the U.S. ambassador to China, who told him to come armed with concrete offers of liberalizing reforms. Yang ignored the advice, and his visit "set the tone for what has since then been only a halfhearted dialogue between senior Chinese and US officials.” 

Meanwhile, the Trump administration’s own goals for the coming talks appear to be a moving target. Trump himself remains focused on the trade deficit between the U.S. and China, which he referenced again in a Wednesday morning tweet: 

Others in his inner circle have different concerns — with alleged Chinese intellectual property theft, forced tech transfers, and market access issues, to name some. Trade experts close to the process say they don’t yet know what the U.S. will demand. "People familiar with the negotiations say... Mnuchin... and Wilbur Ross, the commerce secretary, have at times argued for more dialogue with the Chinese and quicker concessions that would help diminish the trade deficit — the gap between what China ships to the United States and what America ships in the other direction," The New York Times's Ana Swanson and Keith Bradsher write. "Other top trade advisers, including longtime China critics like Robert Lighthizer and Peter Navarro, have taken a tougher stance, arguing that these changes would do little to address the mercantilist and protectionist trade policies China has adopted for decades."

The Trump team has given itself ample time to sort that out: Companies have until May 22 to file complaints against the tariffs, after which the administration will have 180 days to decide whether to go ahead with them.

That time could cut in either direction, providing more room for both sides to work out an agreement while also extending potentially stifling uncertainty. 

"If a true trade war breaks out, executives at top companies are likely to stop some spending on new factories out of fear of what's going to happen next," The Post’s Heather Long writes. “That starts to erase the good that was supposed to come from the tax bill. The large corporate tax cut… was supposed to encourage businesses to hire more people and invest more in new products and factories, but all the uncertainty from trade could curb a lot of that spending. The decline in markets also makes it harder for companies to get money to expand operations.”

PROGRAMMING NOTE: The Finance 202 won't publish tomorrow. We'll be back in your inbox Monday, April 9. Have a great weekend.



Treasuries next? Bloomberg's Chris Antsey and Cecile Gutscher: "Few China watchers would disagree... that dumping the country’s vast holdings of Treasuries, officially standing at $1.2 trillion, represents a nuclear option. After all, it would impose losses on China itself, and potentially cause mayhem in the world’s deepest bond market. And China declined the idea of abandoning U.S. securities when Russia proposed the idea in 2008, according to Henry Paulson. (China and Russia officially rejected the former Treasury secretary’s account.) Yet it’s also true China’s ambassador to the U.S., Cui Tiankai, said last month 'we’re looking at all options,' when asked about the potential for scaling back Treasuries buying."

No easy outs. The Post's Rick Noack: "One major question is looming larger than ever over the world’s two biggest economies: Once you're in a trade war, how do you get out of it?... If past trade disputes can offer any indication, there probably won’t be an easy solution. In theory, the World Trade Organization (WTO) is tasked with solving or preventing exactly such escalating situations... The problem is that 'watching the situation very closely' is almost all the WTO can do at this point... Trump does not appear interested in getting dragged into the dispute settlement process. In fact, he appears to be deliberately undermining the legitimacy of that process by saying that his tariffs plan was based on 'national security' concerns."

From the WSJ's Greg Ip: 

— Tariffs menace manufacturing. NYT's Natalie Kitroeff and Ben Casselman: "The administration did not place tariffs on necessities like shoes and clothes, and mostly spared smartphones from the 25 percent levy on Chinese goods announced this week. But by shielding consumers, Mr. Trump has put American manufacturers — a group he has championed — in the cross hairs of a potential global trade war. If the measures stand, along with China’s retaliatory tariffs, they could snuff out a manufacturing recovery just beginning to gain steam. 'If you want to spare the consumer so you don’t get this massive backlash against your tariffs, then there goes manufacturing, because that’s what’s left,' said Monica de Bolle, an economist at the Peterson Institute for International Economics. 'The irony is, you cannot spare manufacturing from anything because manufacturing is globally integrated. The sector sources its parts and components from all over the world.'”

Soybean farmers howl. AP: "The American Soybean Association, a lobbying group that says it represents 21,000 U.S. soybean producers, says China’s proposed 25-percent tariff on soybeans would be 'devastating' to U.S. farmers. China is the largest consumer of U.S. soybeans, buying about one-third of all U.S. soybean production each year, the group says."

The Post's Philip Bump overlaid 2016 voting patterns on maps showing the sources of commodities China is targeting with its tariffs. As advertised, China is targeting Trump country. Some of those maps: 

A number of other companies and business groups responded with varying degrees of alarm. CNN Money wraps up their responses here.

And JPMorgan Chase CEO Jamie Dimon addressed the issue broadly in his annual letter to shareholders, out this morning: "Reversing the interconnectedness built by our post-World War II institutions is neither desirable nor feasible. As a nation, we cannot isolate ourselves any more than we can stem the ocean’s tide," he writes. "The system, built at great sacrifice, continues to serve our interests. It should be preserved and defended – ideally under strong U.S. leadership… Retreating from the world is not the solution, nor is burning down the current system and starting anew."

Sherrod Brown hugs Trump on trade. The Post's Erica Werner: "Democratic Sen. Sherrod Brown is running for reelection partly by touting his support for the president’s aggressive trade strategy and trumpeting his longtime opposition to the North American Free Trade Agreement and other trade deals Trump rails against. That’s largely a boon in Ohio, where Trump won by 8 percentage points in 2016. 'I’m working with the president to make these tariffs work,' Brown said last week after addressing a gathering of Teamsters at a United Steelworkers hall in Akron. For Brown’s likely Republican opponent, Rep. James B. Renacci, Trump’s trade moves are a growing political headache, forcing the candidate to explain his own past support for trade pacts and his concerns about the tariffs."

GOP anxious. "Republicans are warning... Trump that a trade war with China would deal an economic blow to politically important areas of the country that will cost the party in November’s congressional elections," Bloomberg's Sahil Kapur writes. "The impact of retaliation by China could drown out the GOP message that tax cuts are delivering prosperity, which the party is counting on to save their majorities in the House and Senate in what’s already a tough election year. 'If tariffs and a trade war erase the positive economic impact we have seen from tax reform, it is a big, big problem,' said Michael Steel, a managing director at Hamilton Place Strategies, who previously worked for former House Speaker John Boehner."

WH to WTO: Ignore China's complaint. Washington Examiner's Sean Higgins: "The White House told the World Trade Organization Wednesday that China's complaint about the United States' recently enacted steel and aluminum tariffs was 'baseless' and should be ignored by the international body. China has requested a 'consultation' with the WTO, the preliminary stage in filing an official complaint, following the White House's announcement last month of tariffs of 25 percent on steel imports and 10 percent on aluminum ones. China has argued the tariffs violate the WTO's rules, but the administration says they are exempt because they involve national security."

China's joke. The Post's Emily Rauhala: "The Chinese Foreign Ministry is not known for its sense of humor. But when the Trump administration announced plans to impose $50 billion worth of tariffs, it issued an unusually tart response... Tucked into the Chinese Embassy’s response, between references to win-win cooperation and referrals to the World Trade Organization, was this understated bit of shade: 'As the Chinese saying goes, it is only polite to reciprocate.'"

Bannon: "To hell with Wall Street." Reuters: "Steve Bannon, President Donald Trump’s former chief strategist and 2016 campaign CEO, had a fiery response on Wednesday to Wall Street’s dim view of Trump’s trade actions against China. 'Ask the working people in Ohio, Pennsylvania and Michigan about Wall Street. Wall Street supported and cheered on the export of their jobs. To hell with Wall Street if they don’t like it. It’s time somebody stood up to them and Donald Trump is the perfect guy. Wall Street is always short term. Trump is trying to protect the beating heart of American capitalism - our innovation,' he told Reuters in a telephone interview."

Trump may have options in his Amazon feud. The Post's Jeff Stein: "Trump's government continues to do big business with Amazon. Under President Barack Obama, the CIA awarded Amazon a contract reportedly worth $600 million over 10 years. In December, Amazon Web Services, Amazon's cloud computing wing, announced it was creating a “Secret Region” program as part of its contract with the CIA. (The cloud storage unit will manage classified information for U.S. spy agencies.) Amazon also announced the further expansion of that program with the CIA last month. The Pentagon may also be on track to expand the amount of federal money flowing to Amazon. In April, the Defense Department is expected to bid out a cloud contract worth billions of dollars over the next decade, and competitors have complained that only Amazon appears poised to win it."

Is Trump right about the Post Office? The Post's Steven Pearlstein: "Is Amazon getting a sweetheart deal, as... Trump protests, one that it could never have gotten from UPS or FedEx? Or, as the Postal Service contends, does the Amazon contract allow it to reduce its annual operating deficit and put itself on a more solid financial footing? The answer, it turns out, is that both are right. In a very real sense, the arrangement is a win-win proposition, a great deal for both Amazon and the Postal Service... The reality is that the modern Postal Service has been set up to be a hybrid — part government agency with a mission of universal service, part private enterprise with a mission not to lose money, overseen by an independent regulator whose job is to make sure that the two missions are held in proper balance. Unfortunately, that is a reality that is way too complicated for our president to understand."


Zuck to the Hill. Politico's Ashley Gold: "Facebook CEO Mark Zuckerberg will testify at a Tuesday hearing held jointly by the Senate Judiciary and Commerce committees, the panels announced Wednesday night. It will be a busy week on the Hill for Zuckerberg, who's also scheduled to appear the next day before the House Energy and Commerce Committee amid revelations that the social network allowed Trump-linked Cambridge Analytica to improperly obtain data on up to 87 million Facebook users Senate Judiciary had also invited Twitter CEO Jack Dorsey and Google CEO Sundar Pichai, but they were not on the list of witnesses."

Pelosi pitches new tax bill. Washington Examiner's Joseph Lawler: "House Minority Leader Nancy Pelosi said Wednesday that Democrats will work with Republicans to rework the GOP tax overhaul after taking back the majority next year. Speaking at a Los Angeles event hosted by the group 'Not One Penny,' the California Democrat said her party would aim to work toward a bipartisan “tax bill that creates growth, creates good paying jobs, as it reduces the deficit.

"Senate Democrats were more specific last month in suggesting which parts of the Trump-signed GOP tax cuts they might seek to undo. They proposed to raise $1 trillion by raising the corporate tax rate from 21 percent to 25 percent, restoring the top individual tax rate to 39.6 percent, and undoing other tax breaks for high earners. Otherwise, though, Democrats have been silent on their alternative to the GOP tax cuts. On Wednesday, Pelosi declined to go into specific provisions of the tax code rewrite that Democrats would want."

Waters rebukes BofA. American Banker's Kate Berry: "Rep. Maxine Waters, D-Calif., questioned Bank of America's decision to end free online checking accounts used by many low-income consumers after the bank was a beneficiary of the recent tax reform law and earned profits of over $18 billion last year. BofA has said it eliminated its eBanking service, which until January offered zero monthly fees to customers who bank online and at ATMs, because it no longer needed to offer discounts to get consumers to switch to online banking. But Waters, the ranking member on the House Financial Services Committee, said the decision could still leave consumers without a banking option."


Ackman faces exodus. WSJ's David Benoit: "William Ackman, the famed shareholder activist, is losing investors at a rapid pace and facing a future that would no longer include managing a private hedge fund. After three years of subpar performance, most investors in his Pershing Square Capital Management LP have asked for their money back, with about two-thirds of the cash that could be withdrawn at the end of the year being pulled... Longtime backer Blackstone Group LP has been taking cash out, and JPMorgan Chase & Co.’s asset-management group told clients it could no longer recommend the fund... While a sharp reversal in performance could stem the tide, the fund declined again in the first quarter, trimming its total assets 12% to $8.2 billion... Mr. Ackman is paring staff, stepping back personally from investor relations and isn’t seeking to replace departing money." 


Mester: Fed needs more diversity. Reuters's Jonathan Spicer: "The U.S. Federal Reserve makes better policy decisions when a more diverse group is at the table helping it avoid “group-think,” Cleveland Fed President Loretta Mester said on Wednesday. Mester did not comment on U.S. monetary policy in prepared remarks on diversity in the economics profession, which she said has seen only slow progress toward inclusiveness and opportunity in the last 50 years. The central bank itself has been criticized for lacking diversity, especially in the upper ranks. Of the Fed’s roughly 135 regional presidents in its history, all but six have been men and all but three have been white. 'I have seen firsthand how having a diversity of views expressed and discussed around the table can actually lead to better policy decisions, and there is actual research to back this up,' Mester, one of three women among the Fed’s 15 current policymakers, said." She didn't comment on the New York Fed's hiring of John Williams. 


Coming Up

  • The CFTC and the Center for Risk Management Education and Research at Kansas State University host a conference on agricultural markets on Thursday and Friday

Trump has been pushing Senate Republicans to go "nuclear" in order to pass bills he supports. But what is the "nuclear option"?:

President Trump has been pushing Senate Republicans to go "nuclear" to push through his nominees and legislation. But what is the so-called "nuclear option"? (Jenny Starrs/The Washington Post)

Paul Manafort arrived at court for a hearing to challenge Mueller's authority:

Paul Manafort arrived at court on April 4, for a hearing in his civil lawsuit against special counsel Robert Mueller and Deputy Attorney General Rod Rosenstein. (Reuters)

Former President Jimmy Carter talks to Stephen Colbert about his new book and tells him he prays for President Trump: