Politics, Moderate



Team Trump should be careful what it wishes for on China

Catherine Rampell on

ATLANTA -- For months, President Trump's economic advisers have cheered Chinese economic suffering, celebrating every sign of weakness -- in stock markets, manufacturing, retail sales, investment -- since it surely means China is on the verge of a humiliating capitulation to Trump's demands.

Now might be a good time to put the schadenfreude to rest. Not (only) because it's a bit gauche; as is becoming increasingly clear, there's also a self-interest reason to stop rooting for the world's second-largest economy to falter. When China sneezes, the rest of the world can catch a cold.

Including, perhaps, the United States.

There are multiple avenues through which the U.S.-China trade war has already harmed the United States, of course, many of which I discussed here at the American Economic Association's annual meetings.

First are the tariffs that the president has placed on hundreds of billions of dollars' worth of Chinese products. Which sounds like it would only hurt China, except that most Chinese imports targeted by Trump are inputs that U.S. firms need to manufacture their own products.

Some of those Chinese goods have no alternative sourcing, noted Syracuse University economics professor Mary E. Lovely; even when workarounds from other countries are available, they are often not perfect substitutes and lead to higher pricing for U.S. companies (and ultimately U.S. consumers).

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Then there are the tit-for-tat tariffs that China has placed on American products. These retaliatory duties have foreclosed new market opportunities and destroyed relationships cultivated over decades by U.S. farmers, manufacturers and other entrepreneurs.

Then there's the continued uncertainty surrounding the future of our trading relationship with China. This has complicated investment and hiring decisions, not to mention firms' access to equity-based financing.

While Trump blames the Federal Reserve and Democrats for stock market volatility, the damage his trade wars has wrought is large and quantifiable. Trade policy news has triggered major daily jumps in U.S. stock prices -- swings of at least 2.5 percent -- four times since March. For context, that happened only seven times before, total, over the previous 118 years, according to University of Chicago professor Steven J. Davis.

In a forthcoming paper with Scott R. Baker, Nicholas Bloom and Kyle Kost, Davis has constructed a new equity market volatility index, based on keywords in news stories about stock market movements. The index finds that trade-policy uncertainty was flagged in 26 percent of articles related to equity market volatility since March 2018, compared with just 2.7 percent between 1985 and 2015. "Trade policy went from a non-factor in U.S. equity market volatility in recent decades to one of the leading sources in recent months," Davis said.


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