Conservatives are worried a trade war with China could wipe out the positive economic benefits of the tax-cut law and cost Republicans their majorities in Congress.
“What Republicans and President Trump did in December was create this enormous, pro-growth tailwind going into this November’s elections, and I think that they’ve needlessly created this headwind that could erase all of those gains,” said Andy Roth, vice president of government affairs at the conservative Club for Growth.
“This is a huge unforced error,” he added.
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The tax law has been at the center of the GOP’s midterm messaging, with Trump and Republican lawmakers touting its boost to paychecks and the economy.
In an appearance Thursday in West Virginia, Trump highlighted Sen. Joe Manchin’s (D-W.Va.) vote against the tax bill in a state where Republicans think they could win a Senate seat this fall.
“The Democrats have a problem. I mean if you look at your senator, he voted against [the tax bill],” Trump said.
But conservatives warn that message could be undercut if Trump’s actions on trade counteract the tax cuts’ benefits.
Stocks have already fallen, with traders pointing their fingers to the tariffs as an explanation.
When the final tax-reform package passed the House in December, the S&P 500 index was at 2,697. On Thursday, it closed at virtually the same level of 2,662. While that figure is up some 15 percent since Trump’s inauguration last year, it’s also a 9 percent drop from the market’s January peak.
Trump’s new chief economic adviser Larry Kudlow told reporters at the White House on Tuesday that the market was simply undergoing a “mild” and “overdue” correction, and floated the possibility that the U.S. and China would reach a trade deal before the most recent round of tariffs went into effect, according to CNBC.
The potential of a trade war has made headlines from coast to coast.
“Talk of Tariffs Leaves Local Ag, Steel business ‘in limbo,’ ” read the splash headline in the Fargo, N.D., paper The Forum on Thursday.
“Tariffs grab Ohio’s attention,” proclaimed the lead story in Ohio’s Columbus Dispatch.
In Peoria, Ill., the Journal Star led with a story about Chinese trade practices harming American recycling firms, and followed with a story below the fold on how tariffs could hurt the local farmers and economy.
The latest trade tensions erupted this week when the Trump administration unveiled a list of potential tariffs on $50 billion worth of Chinese imports, including metals, machine parts and electronic components. China responded with a list of its own tariffs on $50 billion worth of American goods, including airplane parts and key agricultural products such as soybeans.
Unlike a previous round of American import taxes on steel and aluminum and Chinese countermeasures on 128 U.S. goods such as fruit, nuts and pork, the latest round of multibillion-dollar tariffs has not yet gone into effect.
Moody’s economist Mark Zandi estimated that implementing the announced tariffs would shave about 0.14 percentage points off the nation’s real GDP over the next year.
Using data from the Joint Committee on Taxation, the Committee for a Responsible Federal Budget estimated that the final GOP tax bill would increase U.S. economic growth by an average of about 0.1 percentage points per year in the initial years of the law.
Republicans already faced challenges in selling their tax bill.
Recent surveys have found that many people aren’t noticing increases in their take-home pay, despite the fact that the IRS has issued updated tax withholding tables.
Republicans also view tariffs as something that could diminish the tax law’s impact and the economy.
“I don’t think we’re headed in the right place on trade policy,” Sen. Roy Blunt (R-Mo.) told reporters in his home state Wednesday.
Sen. John Hoeven (R-N.D.) said in a statement to The Hill that “the best outcome would be to combine regulatory relief, the tax cuts and expanded trade — to keep the economy going and growing.”
“We need free and fair trade, and the key is to ensure that we do have fair trade with China but that we do not have retaliatory tariffs on ag products,” he added.
House Ways and Means Committee Chairman Kevin Brady (R-Texas) on Thursday announced that the panel will hold a hearing next week on the effects of tariff increases on the economy.
“As we continue to work with the Administration to build off the success of President Trump’s tax cuts and regulatory reform, I am committed to listening to U.S. job creators every step of the way to make sure we make all appropriate adjustments to avoid unintended negative consequences to the U.S. economy,” Brady said.
Tim Phillips, president of the conservative Americans for Prosperity network that has spent millions on advertisements in support of the tax law, said that tariffs could be troublesome for Republicans in the midterms, since they have made the economy a key part of their messaging.
“We know with certainty that protectionist policies like these tariffs ultimately hurt consumers and job creators and that is never a winning political strategy, especially if one of your top accomplishments is tax reform and the economic growth it is producing,” he said.
Some GOP strategists note that several of the industries that China has targeted for retaliation are prominent in areas in the Midwest and South that supported Trump in 2016. If GOP voters are nervous about a trade war or begin to see the impacts in their communities, it could impact turnout in the midterms.
Democrats, who have argued that the tax law mostly benefits the rich, also see a trade war as weakening the already limited benefits of the tax cuts.
“Whatever benefit Americans were supposed to have gained from the GOP tax plan, will be wiped away after the trade wars with China,” said Rep. Emanuel Cleaver (D-Mo.). “China will likely increase prices on every product produced and sold in the U.S. and Americans will feel it in their wallets.”
Business groups that championed the GOP’s tax-overhaul efforts have also been warning that tariffs could undo the benefits of the tax cuts.
They worry the tariffs could lead to higher prices on manufacturing equipment, which could make it more costly for businesses to make new investments that the tax law was designed to spur.
The business community has been touting the benefits of the tax law, and bonuses that companies have announced following the law’s passage have helped to increase public support for the measure. But the imposition of tariffs could cause businesses to talk less about the tax cuts, making that message less prominent ahead of the midterms.
The Association of Equipment Manufacturers has run a television ad during programs Trump is known to watch in an effort to convince the president not to impose steel tariffs.
“Our members are going to have much less to say about the positive impact of tax reform if we’re now putting new taxes in place,” said Kip Eideberg, the group’s vice president of public affairs and advocacy.