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Trump’s new tariffs take aim at heart of the U.S. economy: Consumers

President Trump on Aug. 1 defended new tariffs on Chinese imports by falsely saying China bears the sole cost of the tariffs. (Video: The Washington Post)

Administration officials insisted Friday that President Trump’s latest tariffs on Chinese goods would not punish consumers even as some White House aides privately acknowledged the move damaged prospects for the slowing economy to rebound this year.

Trump unveiled new trade ­barriers targeting made-in-China consumer products just one day after Federal Reserve Chair Jerome H. Powell warned that the president’s trade policies were sapping business investment.

The move to impose a 10 percent tariff on an additional $300 billion of Chinese goods starting Sept. 1 is a striking economic gamble as the president approaches a 2020 reelection campaign. Investors, his political opponents and the Chinese government all scrambled to respond.

On Wall Street, the Dow Jones industrial average fell more than 98 points to close at 26,485.01 Friday, its fourth straight daily decline.

Trump’s top economic adviser, Larry Kudlow, brushed off concerns that the tariffs would affect retail prices. “Any consumer impact is very, very small,” he told reporters.

But several administration officials, speaking on the condition of anonymity to discuss confidential matters, said there was mounting concern that uncertainty resulting from Trump’s frequent use of tariffs had squelched business investment and could smother a second-half economic rebound.

“This is going to, in the short term, cause some economic pain. There is no doubt about it,” said economist Stephen Moore, a former Trump campaign adviser. “My view is short-term pain for long-term gain.”

Former vice president Joe Biden, the front-runner in polls for the Democratic presidential nomination in 2020, assailed the president’s strategy. “Yet more proof that Trump doesn’t care about the farmers, workers, and consumers that are being crushed by his irresponsible tariff war with China. It’s easy to act tough when someone else is feeling the pain,” Biden tweeted.

In Beijing, Chinese officials vowed to take “necessary countermeasures” in response to Trump’s escalation. “The U.S. moves to escalate trade frictions and hike tariffs are out of line with American and Chinese peoples’ interests and the interests of the world, and risk bringing the world economy into recession,” a Commerce Ministry statement said.

Companies complain of tariff costs

Before leaving the White House for his golf club in Bedminster, N.J., Trump fired back, saying China needed to make significant concessions for the two sides to reach a trade deal. He also took a shot at the weakening yuan, saying the Chinese currency was ­“going to hell.”

Trump says the tariffs are designed to persuade the Chinese to shrink the trade deficit by buying more American products, and to make fundamental changes in their state-led economic system.

But after more than a year of the most aggressive use of tariffs by an American president since Herbert Hoover, the total trade deficit continues to widen. For the first six months of 2019, the gap between U.S. imports and exports rose to $316.3 billion, up 8 percent from the same period one year earlier, the Commerce Department said on Friday.

Wall Street also disapproves. The Dow rose 43 percent between Election Day in 2016 and January 2018, when the president imposed his first import levy, on solar panels. Since then, the market has risen just 1 percent.

“There’s one ultimate decision-maker, and he doesn’t seem to have a problem with escalation and not very much of an appreciation for the spillover effects and how they might come back to haunt him,” said Stephanie Segal, a former Treasury Department official now at the Center for Strategic and International Studies.

Some economists fear the Fed’s unusual decision this week to cut its benchmark interest rate to offset uncertainty sparked by the president’s unpredictable trade policies could invite further escalation in the form of tariffs on imported automobiles, products from countries such as Vietnam or moves to depress the value of the dollar.

“We worry about an adverse feedback loop where the trade war hinders economic growth, therefore prompting additional Fed easing, which in turn allows for greater trade escalation,” economists from Bank of America Merrill Lynch wrote clients, calling the prospect “dangerous.”

After Trump’s announcement Thursday of additional tariffs on goods from China, financial market expectations of another Fed interest rate cut in September rose to 90 percent from 60 percent, the economists added. With the benchmark rate already hovering around 2 percent, further reductions would leave the Fed with little room to respond to a future recession.

Little more than a month ago, it appeared that the United States and China had agreed to a truce in their trade war after Trump and Chinese President Xi Jinping met at the Group of 20 summit in Japan. The U.S. president said he would refrain from further tariff hikes in anticipation of sizable new Chinese purchases of American farm goods.

But after the purchases — which the Chinese denied promising — failed to materialize and talks in Shanghai this week made little progress, Trump acted.

“It seems like the truce is off,” said Frank Samolis, a trade lawyer with Squire, Patton Boggs.

Hard-liner joins Chinese trade team

The U.S. economy remained largely healthy in July, adding jobs for the 106th straight month and keeping the unemployment rate near a 50-year low, the Labor Department reported Friday.

But some investment professionals detected hints of weakness. Hiring in May and June was lower than first reported, the report said. Job growth this year has been lower than in 2018, and the average workweek, another key indicator of labor-market health, contracted slightly last month.

The economy is growing at an annual rate of 1.7 percent, according to a third-quarter tracking estimate by Macroeconomic Advisers, an independent research firm, down from 3.1 percent in the first three months of 2019.

Douglas Holtz-Eakin, a Republican economist who once headed the Congressional Budget Office, said the September tariffs threatened to discourage consumer spending, which has been holding the economy aloft.

“I don’t see any way this is a good thing. It’s all bad,” Holtz-Eakin said.

Consumer spending, long the backbone of the U.S. economy, is critical now as business investment fizzles because of the costly tariffs and the fading impact of the 2017 corporate tax cut.

Business investment rose an anemic 0.6 percent in the second quarter, and consumer spending grew 4.3 percent.

The latest tariffs could be particularly damaging by raising prices on items such as iPhones, laptops, shoes and baby products, which could cause consumers to spend less, economists warn.

“Tariff man is back and more dangerous than ever to our economy,” said Peter Boockvar, the chief investment officer at Bleakley Advisory Group, in a note to clients. “No amount of Fed rate cuts will offset that.”

The risk now, economists say, is that businesses could trim hiring to match their pullback in capital spending.

Already, manufacturing output has fallen for two consecutive quarters as companies struggled to cope with tariff-induced increases in the cost of components from China.

Factory hiring has stalled, falling from a monthly average of 22,000 jobs in 2018 to 8,000 a month this year.

The administration last year crafted the first three rounds of tariffs on Chinese goods to hit mostly industrial components used by U.S. manufacturers. Those American companies absorbed the costs in most cases by shrinking their profit margins, redesigning their operations and passing along higher prices to their business customers.

The 142-page list of items to be taxed in the next round consists largely of consumer goods.

In remarks to reporters, Kudlow described the tariffs’ impact as “de minimis.”

Nonpartisan groups disagreed. Trump’s latest import tax would cost a typical family of four $350 a year in addition to $850 from existing China tariffs, according to the Tax Foundation.

Higher prices are a near certainty, thanks to the tariffs and the Fed’s willingness to continue lowering interest rates, said Richard Bernstein, a New York-based investment manager.

“The Fed is clearly pro-inflation. The administration doesn’t admit this, but it’s pro-inflation, too,” he said. “Who puts tariffs on unless you want higher prices?”

Anna Fifield and Lyric Li in Beijing contributed to this report.

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