Trump tariffs threaten to drown gains from tax cuts

President Trump’s escalating trade war with China is threatening to wash away the positive economic effects from his signature tax cuts, which could endanger his reelection prospects.

Trump has regularly pointed to the booming economy as a central reason he believes he will be reelected and credits the tax cuts with boosting output and bringing down unemployment.

But economists say that his latest tariffs are all but canceling out the effects of the tax cuts for all but the wealthiest American families. An additional round of tariffs Trump has threatened in hopes of securing a trade deal with China could tip the scales altogether.

{mosads}“It’s a very risky strategy,” says Nicole Kaeding, vice president of Federal Projects at the Tax Foundation, a right-leaning think tank. 

“The tax cuts and jobs act is pro-growth. It should increase the size of the U.S. economy in the long run and is expected to create jobs. The tariffs, however, move in the opposite direction,” she continued.

In mid-May, Trump increased tariffs on $200 billion in Chinese imports from 10 percent to 25 percent.

A study on the New York Federal Reserve’s blog suggested those tariffs alone had the potential to wipe away the benefits of the tax-cut law for most families.

The study by three economists found the tariffs would lead to higher prices that could cost U.S. households an average of $831 a year.

The non-partisan Tax Policy Center found that the Trump tax law would save families earning between $50,000 and $75,000 per year $870, meaning the higher China tariffs would come close to wiping out gains for these households.

The Tax Policy Center study found that a U.S. household earning between $75,000 and $100,000 would save $1,310 from the tax law, while households with annual incomes between $100,000 to $200,000 would save $2,260.

Trump, however, is talking about going further with his tariffs.

He has threatened to impose tariffs on another $300 billion of Chinese imports if progress is not made in negotiations.

The president has also reserved the right to impose tariffs on auto imports on several close trade partners in six months.

And Trump has separately imposed tariffs of 25 percent on $50 billion in Chinese imports, plus additional tariffs on steel, aluminum, solar panels and washing machines.

Those tariffs would all take a bite out of household incomes as consumers face higher prices for goods.

Economists also point out the tariffs are regressive and will hurt lower-income households disproportionately.

In terms of the broader economy, there have been fears that the trade war could lead to a recession.

A Morgan Stanley analysis last week warned that if Trump went forward with tariffs on $300 billion in Chinese imports, “we see the global economy heading towards recession.”

Other reports suggest the trade war wouldn’t completely eliminate the economic benefits of the tax cuts, which Republicans credit with boosting wages and lowering unemployment.

A Tax Foundation analysis found that the tax cuts would boost the size of the economy by 1.7 percent in the long-run, while the trade war would cut down the economy by 0.74 percent, eating up around 44 percent of the economic benefits.

Yet the Tax Foundation also estimated the tariffs could cost the economy 570,000 jobs, significantly more than the 340,000 the tax cuts created. 

There were winners and losers in the tax-cut law and there will be winners and losers in the trade war.

“It’s clearly done damage to some parts of the economy, but the people hit hardest are the farmers, who are affected by the retaliatory tariffs,” noted David Wessel, Director of the Brookings Institution Hutchins Center on Fiscal and Monetary Policy.

And the political repercussions are even harder to predict.

Trump won election in part by running against the trade policies of Democratic and Republican administrations, arguing he would stand up for U.S. businesses. Trade was seen as a factor in the swing states of Pennsylvania, Michigan and Wisconsin, three states no Republican before Trump had won in a presidential election in decades.

How the economy fares between now and November 2020 will surely play a role in Trump’s fortunes, and trade and taxes are only two contributing economic factors.

“Could the tariffs and uncertainty over them hurt the economy? Yes. But there are a lot of other things going right, and trade is still a small part of the economy relative to other things,” Wessel he said.