The Trump administration’s imposition of tariffs on neighbors and allies presents a growing risk for the broader U.S. economy, as the prospect of a tit-for-tat trade war mounts.
The U.S. has imposed steel and aluminum tariffs on the European Union, Canada and Mexico, and they have pledged to return fire on a range of U.S. goods from motorcycles and bourbon to berries, grapes and blue jeans. The Trump administration has also taken steps toward imposing tariffs on industrial supplies and other goods imported from China and is considering an additional wave of tariffs on auto imports.
The U.S. imports $2.36 trillion worth of goods a year. It imports about $29 billion worth of steel and roughly $13 billion worth of aluminum annually. That accounts for less than 2% of total imports and just 0.2% of total economic output. But with the range of goods prone to tariffs widening, the impact could spread. The Trump administration has threatened $150 billion worth of tariffs on Chinese imports—taking steps to proceed on the first $50 billion—and auto imports total $176 billion. Altogether that is nearly 15% of total U.S. imports.
“Uncertainty over trade clouds the horizon,” Federal Reserve Governor Lael Brainard said last week, adding that “an escalation in measures and countermeasures—although an outside risk—could prove disruptive at home and abroad.”
Tariffs have wide-ranging economic effects. They raise the prices of imported goods, nudging up inflation measures and potentially interest rates. That is a negative. They can also boost some domestic industries, such as steel or aluminum production, by reducing foreign competition. That is a positive. But by boosting the prices of imported goods, they also increase input costs for domestic producers, such as car or soda can makers that need steel and aluminum. That is another negative. Higher costs, in turn, can lead to less production and less hiring.
Adding up all the negatives and positives is tricky.
Economists at Barclays estimated in March that steel and aluminum tariffs, by reducing trade volumes and boosting inflation, could reduce U.S. growth by 0.1 to 0.2 percentage point. Oxford Economics, a research firm, estimates that steel and aluminum tariffs by themselves will lead to net job losses of 70,000 in the manufacturing sector—with 10,000 new jobs in the metal-producing sector offset by 80,000 jobs lost in metal-consuming sectors.
That is pretty modest. The U.S. economy generated 223,000 jobs in May alone, and growth appears to be picking up after slowing in the first quarter.
According to a survey of economists conducted by The Wall Street Journal in March, steel and aluminum levies would reduce U.S. employment by 53,000 on average, as gains in the domestic steel and aluminum industries would be outweighed by losses in sectors that purchase those metals. If other countries were to retaliate with limited tariffs of their own, the economists predicted roughly 137,000 jobs lost on net in the U.S.
But the cost in jobs widens as tariffs spread. If tit-for-tat retaliation escalated, raising global tariff and nontariff barriers to levels last seen in the early 1990s, before the creation of the North American Free Trade Agreement and the World Trade Organization, the economists on average saw 845,000 net U.S. jobs lost, with estimates ranging from 10,000 to 3,000,000. David Shulman, senior economist at the UCLA Anderson School of Management, in the survey said it could lead to recession.
Some impacts of tariffs are already showing up in the economy. Prices of futures contracts for U.S. hot-rolled coil steel have risen 10% since early March, while aluminum prices have increased 6.2%.
Economists at Goldman Sachs Group Inc. expect that adding Canada, Mexico and the EU to countries facing tariffs of 25% on steel and 10% on aluminum could boost prices across the broad economy by one one-hundredth of a percentage point.
That is unlikely to significantly alter the Federal Reserve’s policy of gradually raising short-term interest rates to prevent the economy from overheating. Broad measures of inflation are now near the Fed’s 2% target. Still, the central bank is alert to the potential wider impact of trade disruptions on economic growth.
The Fed’s recent “Beige Book” report, a collection of anecdotes across the economy, was flush with references to uncertainty relayed to the Fed by business contacts around the country.
“The major concern manufacturers expressed was trade policy,” the Fed reported out of Boston. “Some worried about the effects of tariffs on their costs, while a maker of testing equipment said they might move some production to Europe to avoid Chinese retaliation against the United States.”
Worsening trade tension might also affect household and business confidence.
“People view the trade tariffs in an unfavorable way, they think the tariffs will hurt themselves and the economy as a whole,” Richard Curtin, director of the University of Michigan Surveys of Consumers, told the Journal. The index of consumer sentiment has drifted lower since March, although it remains high compared with historical levels.
The survey, which polls about 600 people each month, found fewer than 1% of respondents in April and just 2% in May had positive views of tariffs, according to Mr. Curtin, who said views of tariffs were “overwhelmingly negative across all political parties.”
Write to Harriet Torry at firstname.lastname@example.org