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Midterms unlikely to impact Trump's tariff agenda, experts say


President Donald Trump speaks to reporters at the White House on Sep. 17, 2018. (CNN Newsource)
President Donald Trump speaks to reporters at the White House on Sep. 17, 2018. (CNN Newsource)
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President Donald Trump is expected to impose tariffs on additional Chinese goods Monday, a move that officials in Beijing have warned could derail efforts to resolve simmering trade tensions between the two countries ahead of pivotal U.S. midterm elections.

Trump said at a White House event on Monday afternoon that an announcement on tariffs would be coming after the markets close.

The expected duty on a wide range of Chinese imports follows a 25 percent tariff on $50 billion in good imposed in July. China responded to the first round of tariffs with taxes on $50 billion worth of U.S. goods, and it has threatened retaliatory tariffs on an additional $60 billion in imports.

“Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country - and yet cost increases have thus far been almost unnoticeable," President Trump claimed on Twitter Monday. "If countries will not make fair deals with us, they will be ‘Tariffed!’"

Last week, the Chinese foreign ministry announced it had been invited to a new round of negotiations with Treasury Secretary Steven Mnuchin and other senior officials. After The Wall Street Journal broke the news Saturday that the president still intended to impose new tariffs on $200 billion in goods, China’s desire to resume talks promptly cooled, with one official saying the country will not negotiate with “a gun pointed to its head.”

“We are ready to negotiate and talk with China anytime they are ready for serious and substantive negotiations,” Larry Kudlow, director of Trump’s National Economic Council, said at an event hosted by the Economic Club of New York Monday

Trade experts do not expect China to suddenly reverse course on its dubious trade practices in the face of new levies, and some continue to fear President Trump’s reliance on tariffs will have damaging effects on the domestic and global economies.

“Since the $200 billion in new tariffs are imposed on many intermediate goods, U.S. manufacturers using such inputs imported from China would pay higher costs for their goods, which can make U.S. companies less competitive than Chinese, East Asian, and western companies in global market,” said Euijin Jung, a junior fellow at the Peterson Institute for International Economics.

According to Philip Levy, senior fellow at the Chicago Council on Global Affairs and a White House economist under President George W. Bush, the products selected by the U.S. for the original $50 billion were non-consumer goods or products that could easily be gotten from other countries.

“It’s not something flaring up immediately at Walmart when people go buy back-to-school products for their kids,” he said.

That may not be true for the next $200 billion, which would inevitably hit some consumer goods and products for which China is the main supplier. Levy noted that Trump had originally announced intent to place a 25 percent tariff on $200 billion in Chinese goods, so reports it will only be 10 percent may reflect concern about the consequences.

Rob Scott, senior international economist at the Economic Policy Institute, said it is too soon for the initial tariffs to influence trade flows, but even when they do, trade with China remains a small part of the overall $2.5 trillion U.S. economy.

“It just doesn’t move the dial significantly, and that remains true even if you put tariffs on everything we import from China,” he said.

Whatever the cost of the tariffs for China turns out to be, Scott cited two countervailing factors that could largely mitigate them. One is the retaliatory tariffs that will reduce U.S. exports to China and the other is the rapid devaluation of China’s currency, which will make importing Chinese goods cheaper.

“Currency is China’s ace in the hole in all of this,” he said.

The planned escalation of the trade war with China follows potentially significant steps toward resolving hostilities with another major trading partner. President Trump recently announced a tentative pact with Mexico intended to replace the North American Free Trade Agreement.

That deal is far from sealed. Congress might not approve a bilateral agreement that freezes out Canada, and it is not entirely clear the Trump administration has the authorization to negotiate one. Talks on bringing Canada into the agreement continue, but President Trump and Prime Minister Justin Trudeau have both signaled an unwillingness to compromise on key provisions.

“If the administration were able to get a satisfactory NAFTA [replacement] passed, that would help,” Levy said. “Do they seem close to doing that? No, they do not.”

According to CNBC, progress in trade negotiations with China is not expected until after the U.S. midterm elections at this point, with Beijing reportedly eager to see how Republicans tied to Trump’s policies perform. However, experts say control of Congress is unlikely to have significant impact on U.S. trade policy.

“For China, I can see why they might think that,” Levy said. “I doubt the outcome of the election will substantially alter the situation.”

Republicans in Congress have been quick to criticize Trump’s trade policies but very slow to do anything to curtail them. Democrats, meanwhile, are fighting to regain the support of Rust Belt workers who backed Trump in part because he promised a firmer stance against China.

“Trump put his finger on something that is a serious and deeply felt problem,” Scott said. “He’s been completely ineffectual in responding to it, but he put his finger on something.”

China’s strategy to date has been to match Trump’s tariffs dollar-for-dollar, but the additional $200 billion exceeds the value of annual Chinese imports from the U.S., and Trump has threatened another $200 billion on top of that. Retaliatory tariffs are not Beijing’s only option, though.

“The Chinese have made clear there are other things they can do to discomfit the U.S.,” Levy said, observing that the government has already moved to block some acquisitions and mergers.

Chinese media reported Monday one of the country’s most prominent financial leaders is urging the government there to crack down on exports to the U.S. and disrupt supply chains if the U.S. proceeds with the tariffs.

"Only knowing the pain of fighting will stop the war and cause [the United States] to negotiate seriously," said Lou Jiwei, a former finance minister and chairman of China's sovereign wealth fund, at an economic forum Sunday, according to The Associated Press.

According to Scott, President Trump’s fixation on bilateral trade imbalances ignores the issues really causing trade troubles. Presidents Richard Nixon and Ronald Reagan faced similar challenges and they resolved them with across-the-board tariffs and policies that drove down the value of the U.S. dollar.

“He just does not understand how international economics works,” Scott said of Trump.

Kudlow defended the president’s approach at the Economic Club event Monday, claiming the international trading system has been broken for decades because other countries are not playing by the rules and the World Trade Organization is dysfunctional.

“People are blaming the president. I say, ‘Do not blame Trump this.’ He inherited this trading. He’s trying to fix it. He is a reformer. It’s not an easy task,” Kudlow said.

While President Trump remains confident in his tariff-centric approach to trade, many Americans are not. An Associated Press-NORC poll conducted in mid-August showed 72 percent of Americans expect the tariffs will increase the cost of everyday goods and only 19 percent expect them to improve their personal financial situation.

Americans widely approved of Trump’s handling of the economy, but 61 percent disapproved of his handling of trade negotiations. Among Republicans, though, 75 percent approved of Trump’s trade policies in general and about 65 percent backed the tariffs specifically.

Although polls show much of the general public is dissatisfied with Trump’s trade policies, the tariffs score much better with business owners and farmers.

A UBS poll provided to Axios last month showed 71 percent of business owners supported tariffs on China, with more than 60 percent backing tariffs on goods from Mexico, Europe, and Canada as well. Although nearly 70 percent said they were concerned about the possibility of a trade war with China, only 31 percent considered the current disputes the start of a trade war.

According to a Morning Consult poll obtained by CNBC in August, approval of Trump increased in July among rural voters in Indiana, Iowa, and several other midwestern states. Of 19 agriculture-heavy states, the poll only showed Trump’s approval rating drop in one, Idaho, and even then it was still nearly 60 percent.

As crops come in and unsold soybeans pile up, that may change. Recognizing the potential drag on the agricultural sector, the Trump administration announced in July up to $12 billion in new subsidies would be handed out, with payments to farmers and other measures beginning earlier this month.

“The administration presents this as an action that will result in some very short-term pain and then big gains when China concedes If it doesn’t, then we’re stuck with tariffs for a long time,” Levy said.

According to Scott, Trump has complicated matters by repeatedly undercutting and contradicting his negotiators in tweets and statements, and he has offered no solutions Beijing would find palatable.

“There is a strong legacy of resentment about the way they’ve been disrespected in international affairs, so I think the Chinese are highly insulted,” Scott said.

Also questioning the administration’s “in-your-face” approach, Levy doubts this war is anywhere near its end, despite the optimism emanating from Trump and Kudlow.

“If you cut off all avenues to a resolution, then you’re not going to have a resolution,” he said. “At least, not a peaceful one.”

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