When Secretary of State Mike Pompeo announced this week the end of waivers for U.S. sanctions on Iranian oil, he assured the world that oil prices and supplies will be kept in check. But on Tuesday, less than 24 hours after his announcement, oil prices spiked to a six-month high.
Taking Iran’s supplies out of the equation was bound to increase prices, despite what Pompeo and President Donald Trump have said, especially given that Venezuela’s oil supply is similarly sanctioned. This increase in oil prices will have an impact on economic growth in the United States, said Robert E. Scott, senior economist and director of trade and manufacturing policy research at the Economic Policy Institute.
“It slows us down for sure,” he said.
Energy analysts have already started worrying about the oil markets being under-supplied, warning that this action will make everything more expensive. This, in isolation, would be bad, but it is only one of several trade-related decisions made by the Trump administration — including tariffs on imported steel and aluminum and products made with those materials.
The president claims tariffs have been great for the economy. And in some very limited respects, they have been. For instance, the steel and aluminum tariffs have created American jobs in those sectors and increased investment.
“In the narrow, micro-economic sense, some of these tariffs have worked,” said Scott.
Tariffs and deals that (likely) don’t deliver
But the president doesn’t speak in narrow, micro-economic terms — he speaks in broad strokes, and has a tendency to say that America’s economy is thriving under his leadership, seeing anything that speaks to the contrary as a political attack on him.
In the “old days” if you were President and you had a good economy, you were basically immune from criticism. Remember, “It’s the economy stupid.” Today I have, as President, perhaps the greatest economy in history…and to the Mainstream Media, it means NOTHING. But it will!
— Donald J. Trump (@realDonaldTrump) April 23, 2019
The real picture is more complicated. For instance, one of Trump’s biggest successes has been the new trilateral free trade agreement between the United States, Canada, and Mexico, known as the USMCA.
The deal, which has yet to be ratified by lawmakers in either country, will replace NAFTA, which Trump called a “horrendous” deal that allowed Canada and Mexico to take advantage of the United States. Both Mexico and Canada have also fallen under the steel and aluminum tariffs.
But economists at the U.S. International Trade Commission, an independent federal agency, published a report last week on the impact of the USMCA, and their projections don’t exactly spell “MAGA.”
“Anyone who has done Econ 101 will understand that, so we’re not sure who is advising the president on these issues.”
When considering a default scenario (as opposed to the rosiest one), the report found that the new trade deal will cost almost 55,000 jobs and make the U.S. economy shrink by $22.6 billion. The more optimistic estimate has the economy growing by $68.2 billion and 176,000 jobs. In a nod to the uncertainly of this, the authors estimate that the USMCA “would likely have a positive impact on U.S. trade.” Yes: Likely.
“These numbers are peanuts… even if you go for that upper limit of 176,000 jobs, that’s one month’s employment creation, on average, in the United States,” said Dominique van der Mensbrugghe, director of the Center for Global Trade Analysis at Purdue University.
“It’s really hard to create jobs when the country is essentially at full employment. This has what’s puzzled many economists. Normally, you take these actions when you want to provide a little bit of relief for workers… so it’s a little bit strange that this is employment,” Van der Mensbrugghe told ThinkProgress.
The other changes don’t really add up to much — a bit more access to Canada’s dairy market, for instance. “These are really marginal changes,” he said.
Yet another study done by researchers at Princeton University, the Federal Reserve Bank of New York, and Columbia University found that Trump’s tariffs and trade policies had cut incomes in the United States by $1.4 billion a month from January to November 2018.
Winning! But also, losing
So what is the full story here? Can we have an economy that is growing and still have bad policies that hurt it?
“Absolutely, we can have a push me, pull you situation going on in any sector in the economy,” Scott told ThinkProgress.
The U.S. economy is growing, relatively fast — and Scott figures that about 80-90% of that ongoing growth is attributable to President Barack Obama’s policies (like tax cuts, increased fiscal spending, and low interest rates).
That growth increases demands for domestic manufactured goods, but the trade deficit is growing, with 85% of that being in manufactured goods. Now, the economy, explained Scott, isn’t growing as fast as it was last year (when Trump’s tax cut basically gave it a sugar high), manufacturing output is slowing, and the trade deficit is continuing to grow.
And yet another study, by researchers at the University of Chicago and the Federal Reserve Board, shows how much the president’s tariffs are costing consumers of washing machines and dryers.
There are several reasons why the authors focused on washing machines, but a key reason is that the tariffs have applied to them the longest (since February 2018), so there is more data to look at to figure out who is absorbing the cost. Is it the exporting countries (say, South Korea) or the American consumer?
The study found that on average, the American consumer will spend $86 more for a washer and $95 more for a dryer (the tariffs don’t apply to dryers, but since they’re often sold as a set with the washing machines, retailers are just choosing to raise the price).
This will cost consumers an extra $1.5 billion a year, while collecting only $82 million in tariffs annually. In other words, the only entity benefiting from these tariffs are the businesses that sell these items.
Let’s take a look at the factory jobs created in the United States as a result of the tariffs: “Absent additional factors, the reports of increases in domestic employment attributed to this policy of roughly 1,800 workers would result in an average annual cost to consumers of over 815,000 USD per job created (after netting out the collected tariff revenues),” wrote the authors.
It’s important to note that Obama’s tariffs on Chinese tires basically did the same thing in 2009 — so it’s not like the outcome would be entirely unknown.
While Scott argues that the picture is complicated (having to do with retail pricing and competition in the United States), if the tariffs were lifted — say, in the wake of trade agreements — then those jobs would, indeed, go away. This happened under Obama’s tire tariffs.
But Scott said these tariffs are unlikely to be lifted under Trump, who is operating by a political strategy rather than an economic one.
“I don’t think that there’s a plan at all. I like to characterize Trump’s trade policy as a trade policy by press release. If he could come up with a new tariff every day and keep himself in the news, nothing would make him happier,” he said.
The currency elephant in the room
One big problem is China’s currency manipulation, which dropped by almost 10% in value relative to the U.S. dollar in a six-month period in 2018.
“So, we put in place tariffs, but they have been more than offset by the effects of the stronger dollar and the weaker Chinese Yuan,” said Scott.
This is exacerbated by the president’s tax cuts and spending increases, which have increased the budget deficit and strengthened the dollar. It’s also part of the reason why the trade deficit is getting bigger.
Van der Mensbrugghe too connected the budget deficit to the increase in the trade deficit.
“Anyone who has done Econ 101 will understand that, so we’re not sure who is advising the president on these issues. But it’s about the fact that the U.S. spends more than its income so it has to borrow from abroad,” he said.
You won’t hear the president say much about the budget deficit — but he talks about the the trade deficit frequently, especially with China.
As ThinkProgress previously reported, what the president is focusing on in a potential new trade deal with China is how much U.S. goods China will purchase over the next six years. Currency manipulation is not even part of the discussions.
The misalignment of the dollar, Scott said, is the fundamental cause of our trade problems. Fixing it would require building up industries to expand exports, as opposed do just trying to reduce imports.
“The fact remains that one of Trump’s campaign promises was that on day one, upon taking office, he was going to declare China a currency manipulator. And every six months, [The Department of] Treasury puts out a currency report, and they fail to declare China a currency manipulator,” said Scott.