Trump's audacious plan to reverse the early 2000s "China Shock"
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In the 2000s, a so-called China shock swept through the U.S. economy, lowering consumer prices while causing massive losses of manufacturing jobs. Former President Trump's proposed tariff regime would be, in effect, an audacious attempt to reverse it.
The big picture: Trade experts believe that the price of imported manufactured goods would rise significantly if Trump returns to the White House and enacts the aggressive program he has described on the campaign trail. They are not persuaded that a manufacturing renaissance would follow.
- An analysis from the Peterson Institute for International Economics calculates that his proposed tariffs would cost a middle-earning household $1,700 per year.
- Goldman Sachs economists modeled Trump's tariff proposals and found they would add 1.1 percentage points to the U.S. inflation rate and subtract half a percentage point from GDP growth.
- Those amount to an estimated price tag for attempting to reverse the shock to the U.S. economy that came after liberalizing trade with China in 2001 — which brought cheaper goods and lower inflation but also concentrated economic pain in manufacturing-heavy regions.
Driving the news: The Republican platform adopted on Monday embraces Trump-style protectionism. It says the party will support baseline tariffs on all foreign-made goods and phasing out essential items imported from China.
State of play: Trump has spoken of an across-the-board 10% tariff on all imported goods, paired with a 60% tariff on all Chinese imports. These numbers dwarf any from modern experience.
- Trump's earlier China tariffs varied but were mostly 10% or 15%, and applied to a specific list of products that accounted for only a portion of U.S. imports.
Companies that import goods from China would have a few choices of how to respond.
- They could pay much higher tariffs and either raise prices to consumers or tolerate lower profitability (or, more likely, a mix of both). Higher prices would reduce demand, resulting in lower imports — a goal of the policy.
- They could seek suppliers in other countries with low production costs, like Vietnam, Thailand, or Mexico. But the across-the-board tariffs reduce the appeal of that approach, and rerouting supply chains takes time and involves higher costs.
- They could seek to manufacture the goods in the U.S., in line with the goals of a second Trump administration. They would face time delays getting factories in place, much higher wage costs and a labor market in which qualified workers are scarce.
Flashback: The flip side of job losses caused by the China shock was that it really did result in cheaper manufactured goods — pulling inflation down and real incomes up.
- From December 2001, when China joined the World Trade Organization, to December 2016, just before Trump took office, consumer prices fell for such goods as apparel (down 10.3%), furniture (14.7%), appliances (20.1%) and toys (60%).
- That process played out over 15 years, involved hundreds of billions in investment and involved a painful reallocation of workers away from U.S. factories into other industries. It would be hard to unscramble that egg.
What they're saying: "Can they undo the China shock? The answer is obviously no," the Peterson Institute's Mary Lovely tells Axios. "This would be about moving supply chains to different places that aren't America."
- "What it means for U.S. consumers is obviously higher prices," she says.
The other side: To those with Trump's ear on trade policy, the risk of higher consumer prices or lower profits is a small price to pay for supporting domestic manufacturing — and an economic cleavage with a rival world superpower is nothing to be feared.
- "Washington should, in fact, seek to decouple its economy from China's," wrote Robert O'Brien, Trump's former White House National Security Adviser, in an essay published last month.
- He wrote that Trump began a "de facto policy of decoupling" in his first term with tariffs. "Now is the time to press even further," O'Brien writes.
