Moneybox

Adding More Tariffs on Chinese Goods Seems Like a Great Way to Torpedo the Economy. Why Is Trump Doing It?

Donald Trump smirks.
He is very proud of himself.
Chip Somodevilla/Getty Images

So. Here we are again. On Thursday, Donald Trump announced that starting in September he would impose a new 10 percent tariff on goods from China, after trade talks with the People’s Republic apparently failed to make progress. He announced the tariff in a series of tweets, which, if you ask me, sound suspiciously ghostwritten. (Sample text: “We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”) The new border taxes will apply to the $300 billion worth of Chinese goods that, until now, had not faced a tariff. Another $250 billion will continue to be tariffed at a 25 percent rate.

This move comes at a sort of odd time. The U.S. economy has been looking fragile lately—bond markets are screeching in panic, GDP has slowed a bit, and business investment is drying up. Just about everybody agrees that Trump’s trade war is contributing at least somewhat to the uneasiness, though it’s hard to say precisely how much. When the Federal Reserve cut interest rates on Wednesday, Chairman Jerome Powell emphasized that the central bank was doing it in part to make sure that Trump’s trade war didn’t accidentally capsize the economy. (Or, as he put it, the move was meant to “ensure against downside risks to the outlook from weak global growth and trade tensions.” Gotta love Fed speak.)

Now Trump has gone and ratcheted up the conflict, which means Americans will pay even higher taxes on imports and that there will be more uncertainty for businesses trying to figure out their supply chains. It will almost certainly be bad for the overall health of the economy, if only marginally so. So, what’s going on?

One possibility is that Trump simply isn’t worried about the effect that his tit-for-tat with China is having on the economy and just wants to keep fighting it to the bitter end. His public comments about how the Chinese are supposedly paying the tariffs (they’re not) and how the U.S. has nothing to lose from a trade war would suggest as much.

But it’s also possible that this move is partly meant to scare the Fed into taking more action than it did Wednesday. Many investors (as well the president) were hoping that Powell would signal that the Fed intended to pursue an aggressive series of rate cuts. Instead, the chairman hinted that the central bank might only cut rates further if the outlook for the economy got worse and said that “trade tensions” were one of the important factors that policymakers would monitor. A day later, Trump has turned up the heat on those tensions.

Why does Trump want the Fed to cut more? For starters, the president wants interest rates to be as low as possible, because he believes it would be good for the economy (and his reelection chances). The tariffs might cancel out some benefits from lower rates but perhaps not entirely.

Lower rates could also aid Trump against China. When the Fed cuts, it tends to push down the value of the dollar, which makes Chinese imports more expensive to Americans and U.S. exports more affordable to the world. If increasing tariffs leads the Fed to cut rates and devalue the dollar as a result, it’s basically a two-for-one strike against Beijing.

If Trump’s trade war had any thoughtful strategy or obvious path to success, one might even be tempted to call this a canny move. But Trump does not have a thoughtful strategy or obvious path to success. Instead, the president is making a dumb and so far fruitless protectionist game drag on, while possibly putting the economy at risk.