The U.S. Shock to Global Demand in 2019 ( BEFORE COVID19 )

The U.S. Shock to Global Demand in Q4 (Before the Coronavirus)
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The severe TrumpSlump in the global economy was present well-before the pandemic began to unfold. The final quarter of 2019 was especially brutal on the world economy. If there is a global recession, thank Trump, not just the coronavirus.

Brad W. Setser, Steven A. Tananbaum Senior Fellow for International Economics, breaks it down:

The U.S. Shock to Global Demand in Q4 (Before the Coronavirus)

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Tariffs, it is often said, impact the level of trade not the balance of trade. That’s the intuition behind the argument that Trump’s tariffs would not help him achieve his goal of bringing down the trade deficit. Especially if overall fiscal policy was expansive, and thus Trump’s fiscal (and tax) policy was working at cross purposes with his trade policy.

But there are a couple of important caveats here—caveats that sometimes get glossed over (I am guilty of this too).

The tariffs can act as a form of backdoor fiscal consolidation. In order for tariffs to have no impact on the trade balance, the tariffs need to be “revenue” neutral. Trade scholars want to highlight the “trade” impact of the tariffs, not their fiscal impact—so they typically assume that any tariff revenues are offset elsewhere. But that’s not necessarily the case. The fairly broad based tariffs on China (+15 percent on average on a base of over $500b; total U.S. tariff revenue is now running at around $80 billion a year as compared to around $30 billion a year before Trump’s tariffs) act as a small tax on consumption (see Fajgelbaum, Goldberg, Kennedy, and Khandelwal; their most recent update/ table on p. 6 suggests that the government captured 35 basis points of GDP out of the 60 basis points of GDP loss to consumers from the tariffs implemented before September 2019, which is over two times the gain to U.S. producers of import-competing goods).

Imported consumption to be sure, but in a lot of cases there aren’t great options for substituting away from China—which makes the tariffs a clear tax. And a consumption tax would be expected to have an impact on the trade balance.

Tariff related uncertainty can also reduce investment... there is little doubt that the tariffs did contribute to the slump in investment, especially the slump in new investment in business equipment. And there is plenty of empirical evidence that a slowdown in investment leads directly to a slowdown in imports (Bussière, Callegari, Ghironi, Sestieri and Yamano).

Real Goods Imports (exc. Ag and Petrol) vs. Business Fixed Investment in Structures and Equipment

Now in both cases, the tariffs reduce the trade deficit by slowing growth—which isn’t the argument that Trump has typically made in their favor. Taxing imported consumption slows consumption growth —and higher uncertainty lowers business investment […]

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Emphasis ours

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