On Thursday, in “‘I’d Tax Every Benz,’ ‘It’s A Corpse That Still Moves’: Are You Getting The Truth On Trade?,” I suggested (again) that the rhetoric you get out of Donald Trump and his economic spirit animal Peter Navarro is the worst kind of bullsh*t.
Upon reflection, I guess that’s a little strong. It’s not the worst kind of bullsh*t. It’s just the worst kind of bullsh*t if you exclude all of the other bullsh*t you get from the administration on everything from immigration to foreign policy.
But bullsh*t it still is. And indeed, most simulations suggest that adopting a Trumpian trade policy – where “Trumpian” means policy approximates campaign trail bombast – would most like be a disaster for the US, not to mention the global economy.
See the thing is, we need trade. We need globalization. As it turns out, inward-looking, nationalistic tribalism isn’t compatible with the continued advancement of humanity. Imagine that.
Perhaps the most amusing thing about Trump’s trade agenda is that while we know it will probably be negative for the domestic and global economies, we can’t quite put our finger on just how negative, because that depends on the net negative contribution of the President’s other batsh*t policy initiatives. For instance, as I showed earlier this week, deporting all of the illegal immigrants in America would likely plunge the US economy into what BofAML describes as “an outright recession.” Again: imagine that.
With all of that in mind, I thought you might be interested in yet another look at how Trump and Navarro are set to wreck things by adopting the worst kind of “us against them,” zero-sum nonsense imaginable. Behold: more evidence that what you’re hearing from the administration on trade is insane.
Generating a narrative for the economy in this environment has been particularly challenging. Given the uncertainty around policy changes – tax reform and trade – we rely on scenarios to complement our baseline forecast. In our modal forecast, which is for 2.1% growth this year and 2.5% next year, we are assuming that tax reform boosts 2018 growth and that we see little significant change to trade policy, which means that we do not see the Border Adjustment Tax (BAT) or country-specific tariffs.
Simply assuming no major changes to trade policy is the path of least resistance. But it is prudent to discuss the risks, so we run a variety of simulations for changes to import prices – either due to the BAT or tariffs – as well as the response of exchange rates. We find that there is a clear hit to the economy from an increase in import prices and upside to core inflation, but the degree to which depends highly on the dollar reaction.
To get a first-order approximation of the impact of an increase in the cost of imports on the economy (either from BAT or tariffs), we rely on the Federal Reserve Board’s FRB/US model—a large-scale macroeconomic model of the U.S. economy.
Models are a good starting point, but there are other factors that we can’t capture directly in the equations. To note:
1. Our simulation does not take into account the potential for countervailing tariffs imposed by US trade partners which could hurt both domestic and foreign growth. Remember that the global economy is reliant on robust trade with total trade making up 58% of global GDP (Chart 2). According to research from the Peterson Institute, under a full trade war, the US economy would be pushed into a recession over the next 2 years and the unemployment rate would push above 8%.
2. One of the reasons that the Trump administration is calling for a change in trade policy is to bring jobs back to the US that have been filled abroad. In theory, this would generate greater labor force participation and income creation in the US. We did not account for this effect in part because the literature is skeptical about this argument. A 2015 paper from Hicks and Devaraj decomposed US job losses in manufacturing between 2000 and 2010 into technological change (productivity), trade and shifts in demand. They found that the 88% of the job loss in the manufacturing sector owed to technology.
Don’t you love those two points?
First, if Trump and Navarro plunge the world into a trade war the US economy sinks into recession and the unemployment soars to 8%. I guess that’s what counts as “bringing back our jobs ‘BIG LEAGUE.'”
Second, we can’t really talk about an increase in labor force participation because – and BofAML puts it more diplomatically than I care to – “the literature says this is complete nonsense.”
Making America great again, one recession at a time.