Trump's War on US Exports
President Donald Trump’s tariffs on US imports, ratcheted up August 1 to cover another $300 billion in goods that Americans buy from China, are only half the trade war he has been waging since taking office. The other half is to push other countries to buy more US industrial goods, energy products, and farm produce. Ironically, however, US exports have instead become one of the chief victims of the president’s trade conflicts. Export growth has plummeted over the last six months.
Trump’s tariffs have damaged US sales abroad in five ways, severely undermining his stated goal of reducing the trade deficit and strengthening the economy. First, the data have long shown that a tax on imports is a tax on exports. Many US exports depend on imported inputs. Tariffs thus lead to higher costs for exports, raising their prices. Steel and aluminum duties hurt sales abroad of American automobiles and tractors, as Ford and Caterpillar have testified. Fewer imports also push up the exchange rate of the dollar, making US goods more expensive in world markets.
Second, Trump’s import barriers trigger foreign retaliation that cuts US exports directly. Some countries (Europe, Canada, Mexico, Turkey) have responded to Trump’s tariffs on a dollar-for-dollar basis. One major country (China) has reacted partially but in very sizable volume, hitting over $100 billion of US sales with additional duties of about 20 percent even before the latest escalation. A few (Japan, Korea, Switzerland) have not retaliated yet but could well do so in the future. Agricultural sales have been hit particularly hard.
Third, Trump’s macroeconomic policies have added to exporters’ woes. The sharp increases in the US budget deficit with the economy already near full employment, due to the large tax cuts and government spending increases of a year ago, have kept US interest rates considerably higher than they would otherwise be (though still low by historical standards). Higher interest rates further strengthen the exchange rate of the dollar, depressing foreign markets for US goods and services even more.
Fourth, the huge uncertainties surrounding Trump’s trade policies and foreign reactions to them discourage exporters from making the investments needed to improve their competitiveness and expand their markets. The global trading system, including the World Trade Organization, has been put at risk, and it is unclear whether markets will remain open in the future. International trade flows depend on confidence in future stability, and that prospect has been thrown into deep disarray.
Finally, and perhaps most importantly, exporters can be successful only if they are viewed as reliable suppliers. But Trump’s trade policies have rendered US firms among the most unreliable in the world. China is explicitly labeling US companies as “unreliable suppliers.” American soybean and wheat farmers are still suffering from the export embargoes of the 1970s. Incalculable damage has been done to the country’s reputation and thus its competitiveness.
The administration has done virtually nothing to support exports. Its avowed efforts to open new foreign markets have yielded minimal results. Its renegotiated North American Free Trade Agreement (NAFTA) hurts rather than helps US competitiveness. It let the Export-Import Bank languish for two years before helping it re-open for business, and the Bank still lacks congressional reauthorization.
The administration has failed to boost underlying competitiveness by investing more in infrastructure, education, or industrial research and development. Tighter export controls, while perhaps justified on national security grounds, dampen the export prospects further. Education and tourism, two of our most dynamic services exports, have reportedly been dampened by the administration’s restrictive visa policies and xenophobic rhetoric.
It is too early to look for definitive results in the data, and reliance should never be placed on short-term outcomes. However, US export growth has dropped sharply. After climbing by almost 9 percent in the year to September 2018, exports have risen by an annual rate of less than 2 ½ percent since then. They actually fell in absolute terms in two of the last three quarters and the latest month.
President Trump obviously prefers to cut imports rather than boost exports. Every other country is proactive on the export front. Unless the president reverses course, his trade policy will continue to weaken rather than strengthen the US economy as well as undermine the global trading system.