It’s possible President Donald Trump’s tariffs on China could help the U.S. secure a better trading relationship but the strategy could instead blow up in his face, according to a respected U.S. economist.
On Friday, Trump raised tariffs on $200 billion of Chinese goods, from 10 per cent to 25 per cent. China retaliated on Monday with $60 billion in tariffs ranging from five to 25 per cent. The trade war escalation sent U.S. markets into a tailspin.
In an interview with CTV News Washington Bureau Chief Joy Malbon, economist Douglas Holtz-Eakin said that the U.S. is right to try to pressure China into “behaving better” when it comes to things like currency manipulation and intellectual property. But he also believes Trump’s strategy is “very risky.”
Here are four reasons why Holtz-Eakin, the former director of the U.S. Congressional Budget Office and current president of the American Action Forum, believes Trump’s approach could backfire.
1. Tariffs will damage the economy in the short-term
U.S.-imposed tariffs will put pressure on China to make a deal because they will make Chinese products more expensive for Americans, and Chinese manufacturers will therefore sell less.
However, the higher prices will also harm American companies that will need to pay more for the parts they use and the goods they sell, and that could lead to job losses.
“If you add $30 billion of tariffs in the second quarter, that’s like having a $120 billion tax increase,” Holtz-Eakin said. “There will be damage. The only question is how much.”
2. China’s dictatorship has time on its side
Trump obviously believes he can outlast China, but the country’s dictatorship means it might not face as much pressure to blink when the tariffs start to bite.
“(Chinese President) Xi Jinping cannot lose an election and the (U.S.) president can,” Holtz-Eakin said. “So they have time on their side in their view.”
The next U.S. election is 18 months away.
3. Trump has chosen high-profile bilateral talks
Rather going through a multilateral organization like the World Trade Organization, which would have allowed China to save face against its biggest rival, Trump has chosen potentially humiliating bilateral talks.
“For the president to be successful, China has to visibly lose and that’s not something China’s going to do easily, if at all,” Holtz-Eakin said.
4. The U.S. economy may be weaker than it looks
Trump believes he can force China to bend first because the Chinese economy has slowed in recent years. But according to Holtz-Eakin, the U.S. economy isn’t as hot as it might look.
“It is true that in the first quarter growth was 3.2 per cent,” he said. “But if you look inside of that, there was a very weak household sector ... That’s 70 per cent of the U.S. economy. If that further weakens, (Trump) has a problem.”
