Donald Trump’s tariffs and the trade war his administration launched against China turned out to be far more damaging than many believed. That is the conclusion of research finding companies, consumers and the U.S. economy paid a heavy price for the Trump administration’s protectionist trade policies.
In new research, Mary Amiti, an economist at the Federal Reserve Bank of New York, and Sang Hoon Kong and David Weinstein, both economists at Columbia University, used movements in stock prices to measure the response to policy announcements on tariffs and the escalation of the U.S.-China trade war initiated by the Trump administration. “Stock prices are well suited for this purpose because firm market value equals the expected present value of future firm profits,” according to Amiti, Kong and Weinstein. “Therefore, movements in stock prices tell us about changes in the expected future value of firm-specific capital (both tangible and intangible).”
“The results suggest that markets interpreted the impact of the tariffs as much more negative than what economists initially estimated,” said David Weinstein in an interview. “Part of the reason stems from the fact that the U.S. tariffs rose significantly in 2019, and the earlier studies didn’t include these higher rates. Moreover, the new analysis suggests that the tariffs’ impact on productivity is likely to be a factor holding down U.S. growth rates. The tariffs protect the least efficient firms and reduced their incentives to innovate while hurting the most successful U.S. firms, reducing their ability to innovate.”
“We consider three ways in which firms are exposed to China: importing, exporting, and foreign sales (either through exporting or subsidiaries),” note the economists. “It is important to capture indirect imports that are ultimately purchased by U.S. firms because many firms do not import directly from China but instead obtain Chinese inputs through their subsidiaries or the U.S. subsidiaries of foreign firms. For example, Apple Computer’s exposure to China can arise through direct imports, imports obtained by its subsidiary (Beats Electronics), or from the purchase of iPhones from the U.S. subsidiary of Foxconn.”
Among the key findings of the research:
– The economists found a long-term decline in U.S. consumer well-being (or “welfare”) of 7.8%: “Our results show that the trade-war announcements caused large declines in U.S. stock prices, expected TFP [Total Factor Productivity], and expected inflation largely by moving macro variables, but also by causing declines in the returns of firms trading with China. We find that markets expect the trade war to lower U.S. welfare by 7.8 percentage points.” Total Factor Productivity (TFP) “is the portion of output not explained by the amount of inputs used in production,” as defined by the Harvard Business School.
– The decline in stock market value caused by trade war announcements “amounted to a $3.3 trillion loss of firm value (equivalent to 16% of U.S. GDP [Gross Domestic Product] in 2019).” That is larger than the $1.7 trillion estimate in the loss of firm value in an earlier paper from the economists.
The economists identified “11 trade-war announcement dates, comprising six U.S. tariff events and five China retaliation events.” The Trump administration announced tariffs on solar panels and washing machines on January 22, 2018, which were imposed on imports from China and other countries. On February 28, 2018, the administration announced it would imposed tariffs on steel and aluminum, which also affected China and other countries. “All of the subsequent U.S. tariff events only apply to China,” as discussed in the study, including the announcement on May 29, 2018, of a 25% tariff on $50 billion of Chinese imports, the announced U.S. decision to raise tariffs on $200 billion of Chinese goods up to 25% and others.
“The data reveal that there were large and persistent movements in stock prices and inflationary expectations following these trade-war announcements,” according to Amiti, Kong and Weinstein. “We see that the stock market fell on all of the event dates except one U.S. event date and one China event date, with a total drop of 10.4% over all of the events, and 12.9% over the three-day windows (beginning the day before the announcement and extending one day after). These drops in the market imply substantial drops in expected profitability for U.S. firms—a factor that . . . suggests will drive decreases in the expected wage.
“We explore the persistence of these stock-market movements . . . The data reveal that in the five trading days before our events, stock-price movements were quite small. Indeed, there is little evidence of anything out of the ordinary happening in the market before the announcements. However, on the announcement days . . . we see that there was a large decline of over 10%. Moreover, it is also quite striking how persistent this decline is. Even if we track the market five trading days later (approximately one week of calendar days), we see that the market did not recover. Thus, there is little evidence that markets overreacted and bounced back from their initial negative assessment of the trade war on expected returns.”
Amiti, Kong and Weinstein used a sample of 2,859 companies across sectors that are publicly traded on the U.S. stock market and present fascinating data that show more than half of publicly traded companies in the sample were connected to the Chinese economy and affected by the trade war: “We see that only 10% of the firms in our sample import directly from China, and only 2% export directly to China. However, if we take subsidiaries into account, these numbers rise to 24% and 4%, respectively. When we add imports by all firms in the supply chain, we see that 29% of all listed firms in the U.S. import directly or indirectly from China. . . . we construct a variable, ‘Firm Exposed to China’ if any firm in the firm’s network exported to or imported from China or if the firm had positive revenues from China (possibly from affiliate sales). We see that 53% of all firms were exposed to China through one or more of these channels.”
Because the courts and Congress have ceded authority over trade to presidents, Donald Trump had a free hand to conduct trade policy during his presidency. With that free hand, the evidence shows he inflicted significant damage.
Most of Donald Trump’s political appeal rested on being a businessman (as portrayed on The Apprentice) and his perceived stewardship of the U.S. economy. The latest research illustrates the negative impact of his trade policy, leading one to conclude that to the extent a president manages the economy, Donald Trump managed it poorly.