TheU.S.mediaisawarethattheTrumpadministrationhasonlyanarrowwindowofopportunitytoattackChinainthetradewarbeforethesituationintheUnitedStatesworsens.TrumpaimstousethenormalupswingoftheU.S.businesscyclein2018todisguisethepainthattariffsarecausingforthepopulation,companies,workersandfarmers—beforeadownturnoftheU.S.businesscyclein2019-20makesthatpainmoresevere.
Butevenbefore2019,akeyfactoraffectingthesituationwillbeincreasingU.S.inflationanditsdownwardpressureonwages,astariffswillworseninflation.ThissituationiswellunderstoodintheUnitedStates.
ThefundamentaleconomicissueisthatTrump’stariffsincreaseinflationarypressuresintheUnitedStatesbecauseoftwokeyfactors.Firstly,ageneraltariffonaproductagainstallcountries,suchastheU.S.tariffsonsteelandaluminum,raisesthepriceofthegoodsonwhichthetariffsareimposed.
Secondly,tariffsagainstspecificcountries,suchasChina,forcesimporterstobuyfrommoreexpensivesuppliers.
InflationispoliticallysensitivefortheTrumpadministrationbecauseU.S.wagegrowthinrealmoneytermsisverylow.Therefore,evenasmallincreaseininflation,whichhasappearedrecently,hasledtorealinflation-adjustedwagesfalling—atrendwhich,ifitcontinues,willevidentlyleadtopoliticaldiscontent.
WemustthereforeassesstheeffectsofthetradewarintheUnitedStatesbyexamininginflationarytrendsinthecountryandtheirimpactonrealincomes.
Thebusinesscycle
TheTrumpadministration’scalculationisthatitcanusethepresent,perfectlynormal,temporaryupswingoftheeconomytominimizethepaincausedtothepopulationandeconomybyitstariffs.Theinterrelationofthiswiththesituationofinflationandlivingstandardswillbeanalyzedbelow.
First,however,itisnecessarytobrieflyunderstandthesituationoftheU.S.businesscycleanditsimpactontheU.S.economyandpolitics.
Figure1,therefore,illustratesthepresentstateoftheU.S.businesscycle—showingthebusinesscycleoscillationsoftheeconomyaboveandbelowitslongtermaveragegrowthrateof2.2percent.Thecrucialthingtonoteisthatafterarecentbusinesscyclepeakat3.8percentinthefirstquarterof2015,thebusinesscycleturneddownwardsandtheeconomyhadanextremelybadperformancein2016.U.S.GDPgrowthduringthatyearfelltoonly1.3percent.Thisextremelypooreconomicperformancein2016,ofcourse,helpsexplainTrump’selection.
Followingthis,innormalfashion,theU.S.businesscycleturnedupwardsafter2016,reaching2.8percentyear-on-yeargrowthinthesecondquarterof2018.Thishelpsdisguisethepainofthetariffs.ButtheTrumpadministration’sproblemisthatthebusinesscyclewillinevitablyturndownagainin2019or2020,whichmeansthattheeconomicpaincausedbythetariffswillthenbefeltmoresharply.However,evenbeforethistheinterrelationofrisinginflationandlowwagegrowthcancausesubstantialproblemsforTrump.
Wagesandinflation
ItiswellknownthatsincetheinternationalfinancialcrisisthegrowthofmoneywagesintheUnitedStateshasbeenlow.
Figure2showsthattheannualincreaseinmoneywages,whichhadreachedover4percentayearpriortotheinternationalfinancialcrisis,felltoonly1.2percentin2012.Evenafterrecoveryfromthisverydepressedlevelithasbeenatonly2-2.5percentformostoftheperiodsince.TheinevitableeffectofsuchlowgrowthinU.S.moneywagesisthatanyincreaseintheinflationrateseriouslyreducestherateofgrowthofrealinflationadjustedwages,andmayevenresultinrealwagesfalling.
TurningtoU.S.inflation,theupsanddownsinthebusinesscycleinturncreateinflationcycles—anupswingofthebusinesscyclenormallycreatinginflationandadownswingofthebusinesscycleloweringtheinflationrate.
Figure3showsthisclearly—thelargerecessionof2008-09wasaccompaniedbyanactualfallinconsumerprices,theeconomicslowdownin2015-16showedlowCPIgrowth,whileinflationwashigherinperiodsofeconomicexpansion.
ThesetrendsinU.S.inflationinteractwiththeslowgrowthofU.S.moneywagestocreatethetrendsinU.S.realwages.
AscanbeseenfromFigure4,lowinflationin2015-16ledtoanincreaseinhourlyrealwageswhichreached2percentayear,whiletheincreaseininflationin2017and2018ledtoasharpfallinthegrowthofrealwages.ByMayandJune2018,duetorisinginflation,U.S.realwageswerefalling.
AsTheWashingtonPostputitinaratherself-explanatoryheadline,ForthebiggestgroupofAmericanworkers,wagesaren’tjustflat.They’refalling.
“Forworkersin‘productionandnonsupervisory’positions,thevalueoftheaveragepaycheckhasdeclinedinthepastyear…ThegroupaccountsforaboutfourfifthsoftheprivatelyemployedworkersinAmerica.”
TrumpisattemptingtocontaininflationthroughmeasuressuchasputtingpressureonSaudiArabiatoloweroilpricesinatypicalexampleofthewaythisadministrationattemptstoforceitsalliestosubsidizetheUnitedStates,althoughsofarthishashadnoeffectonreducingU.S.inflation.
WhileTrump’sadministrationhasbeentalkingaboutimprovingtheconditionsofworkingAmericans,infacttheirrealwageshavenowstartedtofall.
Tariffsandinflation
AtthispointtheissueoftariffsandU.S.realincomesintersects,becausetariffswillputupwardpressureonU.S.inflation.SomeoftheinflationaryeffectsoftheTrumpadministration’stariffsarealreadyclear.
Tariffsonwashingmachineswerefollowedbya20-percentincreaseinthepriceofwashingmachinesanddryersintheU.S.Thesecondmajortariffintroducedwasonsteelandaluminum.SteelpriceswerealreadyrisingintheU.S.beforethesetariffswereintroducedbutthetariffsinevitablydeepenedthistrendsignificantly.ByJuly2018,U.S.pricesonhotrolledbandsteelwere52percentabovethelevelinOctober2017.Aluminumpriceshavealsoincreasedby11percentsincethebeginningoftheyear.
TheWallStreetJournalnotedthat“Polarisisraisingpricesonits…recreationalvehiclestocover$15millionofthe$40millionintariff-relatedcoststheMinnesota-basedmanufacturerexpectstopayforforeign-madesteel,aluminumandcomponentsfromChinathisyear.”
CocaCola,makersoftheUnitedStates’mosticonicsoftdrink,announcedthatitwastakingtheunusualstepofraisingpricesmidyearinNorthAmericabecauseofrisingcosts,includingpricesforaluminum.Caterpillar,thebiggestU.S.constructionequipmentmanufacturer,announcedthatitexpectedlossesof$100-$200millionfromtariffswhichwillclearlyputupwardpressureonitsfutureprices.AU.S.merchantinquiresaboutpricesfromaclothingmanufacturerbasedineastChina’sJiangsuProvince,atthe2018ChineseTextileandApparelTradeShowheldinNewYorkCityinJulyXINHUATariffsonwashingmachines,whichaffected$10.3billionofimports,andonsteelandaluminum,affecting$44.9billionofimports,coveramuchsmallerrangeofgoodsthanthetariffsaffecting$250billionofimportswhichhavebeenthreatenedbytheTrumpadministrationagainstChina.ThenegativeinflationaryconsequencesofU.S.tariffsagainstChinaonbuyerswillthereforebemoresevere—therespectedWesternanalyticalfirmOxfordEconomicscalculatesthattheaverageU.S.householdsaved$850ayearduetothecheappriceofimportsfromChina.
Lookingahead
ThesetrendsshowclearlywhyfollowingU.S.inflationdataiscrucial.TheU.S.mediaiswellawarethatitisoneofthemainconstraintsonTrumpandposesaseriousriskofpoliticalunpopularity.
AsTheWallStreetJournalnotedundertheheadlineTrump’sNarrowWindowforTradeWinsinChina,withthesubheading“U.S.leverageinitstradedisputewithChinamaybeclosetoitspeak:”
“OntheU.S.side,saladdaysof4percentgrowthand2percentinflationlookhardtosustain...Consumerpriceinflation,alreadyhoveringaroundtheFederalReserve’stargetof2percent,maynotbefarbehind.AndthenexttrancheofthreatenedtariffswillhitindustriesthatChinadominates,meaningfindingalternativesupplierstoalleviateanupwardsqueezeonpriceswillbetougher.Chinasuppliesover50percentofU.S.importsacrosstheaffectedsectors,accordingtoCapitalEconomics.”
“PresidentTrump’swindowforafavorabledealwithChinaisanarrowone.Investorsshouldlookforbreakthroughsbyearly2019—ornotatall.”
ItisforthisreasonthatspeedisimportantforTrumpinhisattacksonChina.ThecurrentupturnoftheU.S.businesscycle,asalways,willbetemporaryandinflationisalreadystartingtorise,worsenedbythetariffsandputtingdownwardpressureonwages.
TheTrumpadministrationthereforecalculatesthatithasawindowofopportunityinthesecondhalfof2018andthebeginningof2019toputpressureonChina.AfterthatthepainofTrump’stariffsontheU.S.populationandonU.Spanies,workersandfarmerswillbecomeworse.
ForChina,ofcourse,thesituationistheexactopposite.IfU.S.inflationrisesinlate2018,andthebusinesscycleturnsdownwardsin2019-20,China’spositionwillonlystrengthen.
CopyeditedbyLaurenceCoultonCommentsto