TREND WATCH: What’s Happening? An escalating trade spat between the United States and China has markets, politicians, and policy wonks on edge. President Trump’s aggressive tariffs against Chinese exports have been widely panned by the experts, with officials warning that a trade war would upend the global economy. The immediate worry is that the tariffs will generate strong headwinds for export-dependent U.S. industries and alienate farm-belt red-zoners from the GOP ahead of the pivotal midterm elections.
Our Take: On this issue, the public leans a lot more toward Trump than the experts. A plurality of Americans, in fact, support the new tariffs. Millennials are less sold than older Americans, but even they see the merits of being aggressive with China. As for the economic impact, this would be worrisome if the tariffs were being applied to all importers. But they’re not. Bilateral tariffs are about as economically meaningful as bilateral deficits: Namely, not very—with the singular (and meaningful) exception of high-tech or media firms having no substitute for China as a supplier or customer.
In the latest sign of a looming trade war, the U.S. Commerce Department has barred Chinese tech company ZTE from purchasing American parts and software for seven years.
This move comes amid escalating tensions between the world’s two biggest economies, with both governments threatening to slap hefty tariffs on each other’s imports. In March, Trump imposed a 25% tariff on aluminum and steel imports from all countries excluding Canada and Mexico. The Trump administration would later go on to exempt Argentina, Australia, Brazil, South Korea, and the EU from the tariffs, leaving China as the single-biggest remaining target. Trump also warned of an additional $60 billion in tariffs coming on other Chinese goods, which have yet to be implemented.
China quickly retaliated with $50 billion in tariff proposals of its own—and has since followed through with $3 billion of them. Then in early April, Trump threatened to implement $100 billion in additional tariffs.
WHY NOW FOR A TRADE WAR?
Trump’s tariffs mark a clear pivot toward the sorts of protectionist policies that he promised on the campaign trail when he talked about getting tough on China and bringing back jobs to the American working class.
The Trump administration wants the tariffs to address three main issues. First and foremost is the massive trade deficit that the United States runs with China, which reached a record-high $375 billion in 2017. Trump also wants to ensure stronger protections on U.S. intellectual property, and is said to be investigating whether or not further tariffs are warranted on this front. Another source of contention has been China’s “Made in China 2025,” a $300 billion program intended to transform the country into the world’s leading high-tech powerhouse. Officials claim that Trump doesn’t want a trade war, but considers the tariffs leverage to secure better terms and stronger IP protection.
China, by contrast, is looking to establish itself as a formidable world power. In offering some concessions alongside his tariff proposals, President Xi Jinping has taken pains to portray his country as a sober-minded alternative to an uncompromising United States. And it’s no accident that the products covered by China’s tariffs target Trump’s political base. According to a Brookings Institution analysis, they would affect about 2.1 million jobs across 2,783 U.S. counties, 82% of which voted for Trump in 2016.
China is more dependent on exports than the United States, and thus has more to lose economically. Given the Chinese government’s tight control over the media and the economy, however, Xi doesn’t have to worry about backlash from businesses or consumers. But Trump does. As John Hopkins University professor David Lampton told The New York Times, China is confident it can “outlast a U.S. administration that…has a public with a low threshold for pain.”
WHAT DOES THE ESTABLISHMENT THINK ABOUT TARIFFS?
In the wake of the tariffs, politicians, business leaders, academics, and the media have been quick to voice their disapproval. After the steel and aluminum tariffs were announced, more than 100 Republican lawmakers signed a letter urging the president not to implement them. Senator Ben Sasse of Nebraska accused Trump of “threatening to light American agriculture on fire.” Headlines abound about small businesses struggling with higher costs and industry giants fretting over barriers to the Chinese market. More than one-third of small-business owners told The Wall Street Journal that tariffs will hurt their businesses; just 5% said they would help.
What’s more, nearly 80% of economists polled by Reuters believe that the measures would hurt or do nothing for the economy. Famously, tree trade is one of the very few issues that nearly all economists across the political spectrum agree on.
Economists are especially dismissive of Trump’s repeated tirades against China’s large bilateral trade surplus with the United States. Few economists believe bilateral balances matter. They point out that no one worries about Vermont’s chronic bilateral surplus with Maine—or with Joe Smith’s chronic bilateral surplus with his employer (or his chronic bilateral deficit with his grocer). What matters, both for states and for individuals, is their total chronic balance with everybody else.
Ditto for nations. Most economists do agree that America’s total chronic current-account deficit with the rest of the world is indeed a challenge—and that, to overcome it, America needs to boost its national savings rate. (Which, in turn, probably requires shrinking rather than expanding the federal deficit, and so we run smack into another Trump policy locomotive moving in the opposite direction.)
WHAT DO ORDINARY AMERICANS THINK ABOUT TARIFFS?
So it’s no exaggeration to say that the respectable establishment is resoundingly opposed to Trump’s tariffs. Yet this outlook isn’t shared by the general public. According to recent polls, the average American is inclined to agree with Trump about his tariffs.
Nearly half (48%) of respondents in a Morning Consult/Politico survey from mid-April said they support the tariffs, while 35% oppose them. When asked how they’ll impact the U.S. economy, 43% said they’ll hurt, and 39% say they’ll help. Support for the tariffs is strongest among older Americans: Majorities of those age 45 and up back them, compared to 37% of 30- to 44-year-olds and 39% of 18- to 29-year-olds.
These findings are in many ways the culmination of a decades-long shift in public opinion. As we’ve discussed before (see: “Globalism in Retreat”), America and indeed most of the world have been broadly souring on globalism and free trade since the late 1990s. In part, America is simply following an old rule of history: Societies always tilt more toward protectionism and trade barriers when economic performance falters and when geopolitical tensions rise.
Also, in part, generational turnover is working against free trade. As Boomers replace the Silent and G.I. Generations in America’s senior leadership positions, the lifelong advocates of free trade as the cornerstone of a prosperous global Pax Americana have been disappearing—and postmodern culture warriors on both the left and the right have been taking their place. From the dot-com bust to 9/11 to the Great Recession, Boomer-led America has turned inward. Shoppers have been urged to “Buy American,” towns to adopt a “new localism,” and firms to adopt an “economic patriotism” (to use Barack Obama’s memorable phrase) by slapping “Made in America” labels on their wares.
With the economy today performing a lot better than it was in 2010, the Pew Research Center reports that Americans are somewhat more likely to say that free trade agreements have “helped” rather than “hurt” their personal financial situation. Surprisingly, however, they are also more likely to say (40% in 2017 versus 34% in 2010) that such agreements are a “bad thing” for the U.S. and are no more likely to say (52% in both years) that they have been a “good thing.”
Coinciding with this ongoing public gloominess on trade in the midst of an economic recovery is the remarkable rise of anti-trade leaders at the top of both political parties. Throughout most of the postwar era, there had been a general bipartisan consensus that free trade was good for the world—and therefore good for America. Then, in 2016, there emerged Donald Trump on the right and Bernie Sanders on the left: the former declared war on “a leadership class that worships globalism over Americanism”; the latter vowed to overhaul “disastrous” trade deals like NAFTA if elected president.
Along the way, suddenly, Republicans switched from being the more pro-trade party to the more anti-trade party. Historically, sure, most “professional class” Democrats (led by economists) have always backed free trade, but this support was heavily counterbalanced by working-class Democrats (often union members) who viewed free trade as a threat to their wages and their jobs. As recently as the late 1990s and early 2000s, “anti-globalism” was a credo of union leaders and anarchist radicals, who crashed meetings at the IMF and World Bank to protest globalist policies that they viewed as favoring “corporate fascists.”
Today, these left-wing progressives don’t need to take to the streets to battle against globalism. They have a right-wing president who’s doing it for them. (Even today, progressives are cautious about criticizing Trump’s anti-trade tirades too harshly: For so many years, they were their tirades.) The GOP has also stolen the anti-immigration momentum from the left. For decades, it was the party of unions, not the party of business, who railed against the influx of cheap foreign labor. But trade clearly is the more drastic and surprising reversal.
Our earlier Pew chart, when broken down by party affiliation, illustrates this partisan reversal. Notice that, until the Great Recession, Republicans were likely to view free-trade agreements more favorably. Beginning around 2015, that all went the other way. In part, this shift reflects Republicans and Democrats changing their minds; in part, it reflects voters resorting themselves into different parties (older working-class Americans to the GOP; young professionals to the Democratic Party).
Breaking down the most recent year of the Pew results by age reveals another striking contrast: The young favor free trade much more than older age brackets—under age 30, by over two-to-one.
Some of this gap is due to phase of life: Most generations, when young, tend to associate openness and cross-border competition with new opportunities, so they tend to welcome it. Most generations, when older, more likely associate free trade with threats to the jobs and status quo they currently enjoy, so they are wary of it. (This basic age gradient has been true for United States since the 1990s; it was true as well in 1995 across nearly all high-income countries in which the young were better educated and more urbanized than the old.)
There may also be generational forces at work. A disproportionate share of today’s young adults—Millennials—are Democrats, which probably disinclines them to agree with Trump’s defiantly anti-inclusive “America First” rhetoric. More importantly, a disproportionate share of them have immigrant parents, which reinforces their openness about trade (and immigration) in a very personal way with real-time connections to people, friends, and family abroad. Millennials, in short, may figure strongly among the Democratic-leaning voters who have recently been moving “reverse trend” from opposing to favoring free trade.
THE CHINA CONNECTION
All of the above suggests a rough road ahead for Trump’s tariff initiative. Sure, Americans as a whole have been drifting away from globalism over the past fifteen years. But still—read the surveys—it remains true that most Americans continue to support free trade. And, when specifically asked about free trade, Americans views have turned somewhat more positive over the past 18 months. (These surveys include Pew, Gallup, NBC/The Wall Street Journal, and Morning Consult.) The huge support for free trade among younger voters seems especially daunting.
So is Trump walking out on thin ice? Is he overestimating popular support? Is he utterly out of step with America’s youth?
Maybe not. In his recent tariff-mongering, Trump has been careful not to portray himself as against free trade per se or as waging economic war with the rest of the world. Rather, he insists, he is striking against “unfair” actions by “economic adversaries” in general and (increasingly) against one adversary in particular: China.
Here Trump is on more solid ground. As we’ve written about before (see: “America Looks East—with Apprehension”), the American public has long been wary of China’s rapid development into a global economic powerhouse. Americans’ views of the country are consistently more negative now than they were five years or a decade ago. According to Morning Consult, the share of respondents who label China a threat to the United States (34%) has recently edged out those who believe it’s an opportunity (32%).
The belief that China is a rising national competitor who manipulates global trade rules to its advantage isn’t just a concern of President Trump or his more populist GOP supporters. It is triggering serious concern in the U.S. defense establishment, whose most recent (2018) long-term strategic overview calls China “a strategic competitor” with an “authoritarian model” that is “using predatory economics to intimidate its neighbors” while “undermining the international order.” It informs the Senate Democrats’ trade platform rolled out last August, which singled out China as a threat to American jobs that merited the creation of a watchdog council. It is widely shared in Europe: German, French, and Italian leaders have voiced many of the same complaints against Xi Jinping’s “soft protectionism” and “preferential treatment.”
Bottom line? Trump does not bill himself as opposing free trade. He bills himself as opposing the abuse of globalization’s rules by a particular adversary (China) whose size, rapid growth trajectory, and authoritarian values and goals are worrisome to most Americans. As such, Trump’s announced trade measures against on China are substantially more popular than attitudes toward “free trade” in general might suggest. Look back at Chart 2. Note here that Trump’s policies enjoys a huge margin over age 45 and breaks even under age 45. Even Millennials under age 30 give Trump a slight edge.
Two recent Morning Consult surveys confirm that, when Americans are asked about China rather than about free trade, the results break much more favorably for Trump. Americans over age 45 agree that China represents a “threat” to the world economy—with marginal disagreement under age 45 more than compensated for by emphatic agreement over age 65. Most Americans also think that Trump’s China tariffs will “help” the U.S. economy. (Ever the optimists, Millennials are most likely to say they will “help” even though they are among the least likely to support the tariffs!)
In keeping with the adversarial framing, U.S. Trade Representative Robert Lighthizer and National Trade Director Peter Navarro repeatedly make clear that they favor “free, fair, and reciprocal trade.” Trump is taking on China, they say, to push that regime to play by the rules and stop taking unfair advantage of other nations. This argument may not persuade many economists, but it is going over passably well with the American public.
HOW WILL THE TARIFFS PLAY OUT?
Let’s now move beyond popular opinion. Let’s look at how the Trump tariffs will impact the economy and the 2018 midterms.
Big business watches with interest. Let’s start with what’s already in play: the U.S. aluminum and steel tariffs as well as China’s retaliatory tariffs. Squeezed by the former are U.S. companies that heavily consume aluminum and steel, such as automakers (General Motors) and manufacturers (Caterpillar). Firms that produce the items subject to China’s new tariffs—a far-ranging list that includes pork, soybeans, tobacco, and aircraft—are also handicapped. U.S. farmers in particular are lamenting the timing of the trade war, which comes amid the weakest year for farm income in more than a decade.
The next wave of tariffs, if implemented, would expand the list of affected parties. If the additional tariffs Trump has proposed (which are largely on products used in high-tech fields like robotics and aerospace) become reality, the information technology sector will feel the pain next. U.S. tech firms with a robust Chinese presence such as Apple, Intel, and Nvidia stand to lose the most.
Of course, not all firms will feel the pain. Companies in industries with few tradable inputs or outputs (utilities, telecoms, health care) or in industries where trade affects all players about equally (retail, real estate) will emerge unscathed. And companies with few foreign suppliers and lots of import competition may even have reason to cheer.
Though some of Trump’s yet-to-be-implemented tariffs may prove to be just negotiating ploys, the stakes are so high that all those who could be affected are already bracing for the fallout. Even the mere prospect of a trade war has been enough to send stocks tumbling: On April 6, a day after Trump’s $100 billion tariff proposal, the Dow closed down 2.3%. Industrials like Boeing and Caterpillar lost more than 3% on the day, while U.S. oil and tech stocks also paid the price.
The prospect of bilateral tariffs. One further but important consideration: As we’ve seen, the American public supports Trump’s tariffs to the extent they see them as directed against a recognized economic adversary (like China). They do not support generalized protectionism against all other economies. Already, it seems, Trump is adjusting his course accordingly—for example, by holding off on applying the steel and aluminum charges on practically every significant metal exporter other than China. If Trump continues along this path—focusing on China and giving a pass to pretty much everyone else—the consequences will be different than what most experts are predicting.
The impact on U.S. firms and the economy will be less severe than a general tariff. Why? Because markets in most fungible goods are very adept at flowing around bilateral trade restraints. Yes, at first glance, a Chinese retaliatory tariff against soybeans (for instance) would seem to be devastating to U.S. farmers. But as some experts have pointed out, a decline in demand for Chinese imports doesn’t necessarily mean a commensurate decline in U.S. exports. Agricultural commodities are highly standardized—a bushel of U.S. soybeans is the same as a bushel from elsewhere.
So when China turns to, say, Brazil to fill its new soybean void, Brazil will be forced to leave many of its former customers in the lurch. Those customers will then turn to the United States to fill their soybean void. Prices may rise on the margin due to higher transport costs and supply-chain adjustments, but so long as total demand for soybeans remains constant, production should not be affected. In other words, when we’re talking about bilateral trade in stuff like steel, aluminum, and soybeans, it’s hard to imagine any significant long-term economic consequences.
On the other hand, when we’re talking about nonfungible trade—like in specialized technology, patents, and trademarks—well, then bilateral barriers can indeed make or break individual firms.
This is probably the main thrust of what Navarro, Lighthizer, and Commerce Secretary Wilbur Ross want from Trump’s tariffs. They want to disrupt and slow the advance of China’s cutting-edge IT winners. If that requires burdening U.S. cutting-edge IT winners with some collateral hardship—nixing suppliers or customers or M&A partners from the likes of Apple, Google, Qualcomm, Nvidia, Intel, and a host of smaller American innovators—well, so be it. Unlike automakers or soybean farmers, these Silicon Valley professionals represent precious few voters. And even fewer Republican voters.
This implies that the impact on geopolitics will be more severe than a general tariff. Protectionism directed against everyone imposes a much greater economic burden, but singles no one out. Bilateral protectionism creates a de facto enemies list. As we have witnessed with other, smaller nations (Syria, Iran, Venezuela, and North Korea), Trump personalizes his adversaries. If China rather than NAFTA constitutes the “key” to understanding the end goal of his trade policy, along with the popular support behind it, Trump could finally be executing a “pivot to Asia” (a phrase coined by President Barack Obama and Secretary of State Hillary Clinton) in ways that neither Democrat ever imagined.
These tariffs may or may not put the GOP in a tough spot. Everyone agrees that the GOP faces tough odds in the upcoming midterms. They’re tied to a president whose popularity has reached unprecedented lows, and they’re facing an energized Democratic opposition. In the House, where every member has to run for reelection, forecast markets are betting heavily on a Democratic takeover. (See: “About Everything: 4/24.”)
Most prognosticators say that the trade war with China will worsen the anti-Trump tide. According to this story, the tariffs pit the Rust Belt against the Farm Belt: Steel mills and manufacturers that face stiff import competition win, while farmers who export a lot to China lose, leaving rural-area Republicans praying that their constituents’ loyalty to Trump will outweigh their bottom lines.
To be sure, trade will be much discussed by voters, especially in the heartland. The same farm states that are top producers of soybeans, beef, and other tariff targets will host many of this fall’s tightest contests for Senate (North Dakota, Missouri, Indiana), House (Kansas, Iowa, Minnesota), and governor (Ohio, Iowa, Minnesota, Michigan). In fact, of the 20 top soybean-producing states (as measured by planned 2018 acreage), 17 voted for Trump in 2016.
What’s more, if steel and aluminum prices go up because of the tariffs, it could be bad news even in the Rust Belt—since the firms dependent on these metals heavily outnumber the firms producing these metals. Here too we see a huge overlap with Trump country: Red states like Texas, Mississippi, South Carolina, and West Virginia all sit near the top of the list when it comes to steel/aluminum-dependent employment.
These bad-news scenarios feed into a delicious narrative for the Democrats. Some hope for a repeat of 1980 (in reverse), when the Farm Belt deserted Jimmy Carter following a grain embargo and flocked to Ronald Reagan.
All told, these hopes or fears are probably overblown. One lesson of Trump and Brexit in 2016 is that voters often don’t vote in their immediate economic self-interest when they perceive that community or national sovereignty is at stake. One can imagine farmers deserting Carter for Reagan. But deserting Trump for… Nancy Pelosi or Chuck Schumer? That’s harder to imagine. Also, as we have seen, rising bilateral trade barriers between the United States and China are unlikely to trigger burdensome economic costs for most firms (outside of Silicon Valley and Hollywood) that voters care about.
