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One cost of trade tensions: economic uncertainty

Why We Wrote This

On trade issues, as in other arenas, President Trump has shown an eagerness to swing for the fences. That makes us wonder: Is an aggressive and unpredictable style backfiring or about to bear fruit? 

A woman passes by a ZTE building in Beijing, China on May 8, 2018. President Trump's weekend social media musings about China injected new uncertainty into Washington’s sanctions against Chinese tech giant ZTE and planned trade talks between the two countries.
Ng Han Guan/AP
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US trade sanctions recently brought one big Chinese technology company, ZTE, to the brink of collapse. Then, in a surprise tweet, President Trump risked domestic ire by signaling he would try to help save the company as part of ongoing trade talks with China. Closer to home, Mr. Trump has threatened to pull the United States out of the three-way North America Free Trade Agreement. Yet those talks with Mexico and Canada keep muddling along, past an expected deadline. The US has pulled out of the Iran nuclear deal, yet how the American sanctions will play out remains unclear. These all show Trump’s penchant for taking high risks in the hope of high rewards. But at least in the short run, one cost is higher uncertainty. That can mean delays or rethinking new investments for businesses from farm exporters to high-tech titans awaiting clarity. In turn, that’s a drag on the economy, as large companies can’t adjust their global supply chains on a dime, says trade expert Ted Moran. “Political successes,” he says, “will not make up for this uncertainty.”

After President Trump reimposed sanctions on Iran – potentially restricting sales of its 4 percent of the world oil production – oil markets surged. But gas prices in Waltham, Mass., did exactly nothing.

Hours ticked by. A day. The filling station signs dotting the Boston suburb’s main drag remained unmoved. After a week, prices had pushed upward a few pennies per gallon – noticeable, but hardly dramatic.

Last month, US soybeans initially lost nearly 5 percent of their value after China threatened new tariffs on US goods if the White House carried out its broadside on Chinese imports. Then prices quickly stabilized.

And on Monday, share prices of US tech companies initially hit hard by a US ban on doing business with China’s ZTE phone manufacturer continued their recovery after Mr. Trump’s surprise tweet that he wanted to keep ZTE from closing down.

It is now a hallmark of US foreign policy that this president stakes out aggressive positions but follows up with less-sweeping actions or policy proposals stated so vaguely that they may or may not be game-changers. It’s a high-risk, high-reward vision for bargaining, which could lead to breakthroughs that boost US jobs and businesses and lessen geopolitical tensions. Or ignite a trade war.

“There’s a lot of uncertainty until we know what he means,” says Stephan Haggard, a trade expert at the University of California at San Diego. He is speaking of Trump’s proposed sanctions against Iran, but he could just as easily be talking about his trade negotiations with Canada and Mexico over NAFTA, the tense trade standoff with China, or nuclear talks with North Korea.

The challenge is that this uncertainty comes at a cost. The cloudier the future looks, the more companies pull back or delay new investments until the outlook is clearer.

“Even if the United States avoids a full-blown trade war, the country is already incurring economic damage by raising uncertainty about future economic policy and eroding its authority in international policy making,” writes Matthew Slaughter, dean of the Tuck School of Business at Dartmouth College, in Foreign Affairs.

There’s little question that uncertainty has risen. According to the US Policy Uncertainty Index, created by economists at Northwestern, Stanford, and the University of Chicago, jitters have increased 37 percent since Trump’s election, Mr. Slaughter points out.

How big a drag it represents is difficult to measure, especially at a time when US capital investment is rising, as the Trump tax cuts kick in atop an already healthy economy. Kiplinger last month forecast that core business fixed investment would rise 7 percent this year, after last year’s solid 5.3 percent increase, as long as trade tensions with China abate.

That optimism seems to be the prevailing view in the stock market, which has recovered about a third of its losses since January, when concerns about a trade war with China began to weigh on investors.

Clearly, some initial fears have proved overblown. China’s threat to impose a 25 percent tariff on US soybeans, for example, is not as dire for American farmers as it sounds because US competitors (Brazil and a drought-ravaged Argentina) can’t replace US exports. If they supply China, then US soybeans will flow to the European and other markets that Brazil and Argentina abandon.

Where the threat matters is upstream from the farmers, says Alex Breitinger, a commodity broker with Paragon Investments in Silver Lake, Kan. He has clients who are looking at buying soybean export facilities but have been stymied by the uncertainty over trade. Should they invest in facilities geared toward sending raw soybeans to China or those that cater to Europe, which prefers processed soybean meal? “They suddenly are faced with very drastic changes here,” says Mr. Breitinger.

Even if these issues are eventually resolved, there’s a drag on the economy from deals averted or postponed. Sometimes governments may impose delays because of the trade tensions. On May 17, for example, China’s antitrust officials approved the sale of part of Toshiba to investors led by US-based Bain Capital. That was eight months after the troubled Japanese conglomerate concluded the deal. And it was widely viewed as a signal of China’s willingness to ease trade tensions, coming just days after Trump’s own concessionary move – the controversial surprise tweet saying he would work with China to help ZTE, the Chinese company the US was effectively putting out of business because of its prohibited sales to Iran and North Korea.

If and when Trump does bring this period of uncertainty to an end – either with breakthrough deals or increased trade sanctions or some combination of the two – he will continue to face trade challenges as new industrial winners and losers emerge. Already, his tariffs on steel and aluminum are raising voices of alarm within his own party as the sanctions begin to bite.

“While I agree that we must punish China for its abuses, I also believe that tariffs can create overwhelming damage to Americans and must be used cautiously,” Rep. Kevin Brady (R) of Texas, chairman of the powerful House Ways and Means Committee, wrote in an op-ed last month. “Like taxes, they curtail economic growth, discourage new investment, delay new hiring and put American workers at a huge disadvantage to foreign competitors.”

Small businesses – from boat manufacturers to auto-part makers – are also complaining loudly.

“I am a business owner, a proud Republican, and a voter who supports President Donald Trump’s campaign to level US trade imbalances. I am also angry, frustrated and a little scared, because the unintended consequences of the president's $50 billion tariffs on China would cripple my business in Auburn Hills and strip my 50 employees of their good-paying jobs,” Mary Buchzeiger, CEO of a Detroit-area component manufacturer for the auto industry, wrote in an op-ed this week.

Some of the biggest impacts of trade sanctions, however, would fall on big multinational corporations whose supply chains depend on operations in nations around the world. For example: 16 US companies, including high-tech stars such as Apple, Intel, Microsoft, and Qualcomm, made a combined $105 billion from China alone last year, nearly a quarter of their entire sales, according to a new analysis by investment bank Jefferies.

Tariffs or other protectionist measures could prompt them to adjust their supply chains, presumably to more expensive locations, which will prove another drag on the economy.

“Trump's moves are affecting large companies in cross-cutting ways,” Ted Moran, a nonresident senior fellow with the Peterson Institute for International Economics, a Washington think tank, writes in an email. “The tax cut has given them more cash. But … multinational corporations have designated supply chains across borders, and they cannot shift production from one country to another very rapidly. Adverse measures – or the threat of protectionism – slows down their networks. Political successes ... will not make up for this uncertainty.”

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