The Unforced Error of Trade Policies That Impede the Economy

Mark Green
Posted February 8, 2019

The nonpartisan Congressional Budget Office’s new report, “The Budget and Economic Outlook: 2019 to 2029,” says what we’ve been saying for some time now – the administration’s tariff policies are a drag on the broader economy.

CBO projects that “the recent changes in trade policy in the United States and its trading-partner countries will reduce the level of U.S. real GDP by about 0.1 percent by 2022.” CBO explains:

Tariffs are taxes levied on imported goods and therefore raise prices on imports in the same way that a sales tax raises the price consumers and businesses pay for goods and services. Tariffs reduce domestic GDP mostly by raising the prices paid by U.S. consumers and businesses, which reduces the purchasing power of domestic consumers and increases the cost of business investment.  

Now, 0.1 percent might not sound like a lot over that time period, but potentially we’re talking about hundreds of billions of dollars subtracted from the economy. Dean Foreman, API chief economist, says it’s particularly concerning in the context of an economy that’s decelerating (his chart, below):

“Each incremental 0.1 percent of lost growth means more when overall GDP growth is slowing, as CBO projects a drop from annual growth of 2.7 percent in 2018 to 1.9 percent this year and 1.6 percent in 2020 and 2021. Make no mistake: This trajectory is concerning and may feel like a recession along the way.”

So, with the economy slowing, why choose policies that slow things further? It’s an unforced error that should be rectified, to head off impacts on jobs and economic opportunity.

Again, this is CBO – long recognized as an authority on economic issues – saying that current tariff policy is hurting the U.S., further weakening an already slowing economy.

We’ve talked about the administration’s tariffs and quotas on steel, widely used in the natural gas and oil industry, and the potential impacts on the cost of materials used in critical energy infrastructure, such as pipelines. Projects cost more and can be delayed, both potentially affecting U.S. jobs and American consumers. CBO:

In the short run, CBO projects that the newly implemented tariffs will raise the prices paid by U.S. consumers and businesses directly by making imported goods more expensive and, indirectly, by making the goods and services produced with imported goods more costly.

Further, CBO estimates that on net, new tariffs will increase the price indexes for consumer spending and private investment, with negative economic results:

Like other price increases that result from taxes, those higher prices will reduce consumer spending by diminishing the purchasing power of consumer income and will reduce investment by making capital goods more expensive.

Then there’s the domino effect when countries with which the U.S. trades retaliate, affecting U.S. exports. Indeed, we’ve noted the impacts on U.S. exports of liquid natural gas. U.S. trading partners imposed their own tariffs of 9 percent of all goods exported by the U.S. CBO says changes in trade policy “increase policy uncertainty among investors, which may further reduce U.S. output.”

In the continuing debate over trade and tariff policy, CBO’s analysis is critically important. U.S. energy has been an important economic driver, and actions that impede growth work against larger goals of growth, prosperity and greater energy security. Current tariff and quota policy is a false step that can be fixed. API President and CEO Mike Sommers:

“American natural gas and oil power the U.S. economy and deliver abundant and affordable energy to consumers across the country. “In order to meet the president’s goal of energy dominance, we need trade policies that support the American energy revolution and enable critical infrastructure projects that create jobs and keep our country moving.”