International Trade Plans May Lead to Recession

COLUMBUS, Ohio — If the Trump Administration follows through on international trade plans, the United States would see increased unemployment and a recession, according to an agricultural economist at The Ohio State University.

Ian Sheldon, the Andersons Chair in Agricultural Marketing, Trade and Policy in the Department of Agricultural, Environmental, and Development Economics (AEDE), said if Trump were to implement a 45 percent tariff against China and a 35 percent tariff against Mexico, “He’s going to put the economy into a recession, if the Chinese and Mexicans retaliate, as I expect them to do.”

AEDE is a department within the College of Food, Agricultural, and Environmental Sciences.

Citing the Peterson Institute for International Economics, Sheldon anticipates that within three years of the launch of a trade war, U.S. inflation would increase due to rising import prices and to a Federal Reserve response of raising interest rates on top of the expected increases this year. As a result of the increased cost of borrowing, investment would decline, pushing the economy into recession within three years, leading to the loss of 4.8 million to 5 million jobs.  

“A trade war would be self-defeating, in my opinion and in the opinion of most economists,” Sheldon said.

Low-income Americans, who already spend a higher percentage of their income on necessities like food, would be hardest hit. “It will lower the purchasing power of the poorest in society,” Sheldon said.

With increased interest rates and a stronger dollar, the trade deficit would only worsen, leading to a repeating cycle.

Global Supply Chains

Sheldon said people have misconceptions that the move of manufacturing jobs to Mexico, China and other countries caused the loss of 5.8 million jobs in the late 1990s.  But most of those losses were due to technological advances that replaced people. He estimates that 13-17 percent of those job losses could be attributed to international trade, but that 60-80 percent were due to technology that brought increased productivity.

A trade war would hurt the U.S. economy in other ways, Sheldon said, and would be unlikely to bring many jobs back. About 80 percent of world trade now occurs through global supply chains, where higher skill work is completed in one country, and lower skill work is done elsewhere.

Cars assembled in Mexico, for example, start out in the U.S., with about 40 percent of their value first completed here. Taxing the cars coming back to the U.S. would hurt our own export market, Sheldon said. If the U.S. targets China, assembly work could easily be moved to Vietnam and nothing would be gained.

Impact on Agriculture and Food Prices

China is expected to import nearly 3.2 billion bushels of soybeans during this marketing year (2016-2017), according to the U.S. Department of Agriculture, accounting for about two-thirds of the world’s imports. Some 59 percent of U.S. shipments go to China, so American soybean growers would be hit hard in a trade war.

Mexico represents a large market for corn as well. Representing the third largest agricultural export market for the U.S., Mexico imports $2.3 billion worth of our corn.

The U.S. imports about $4.8 billion worth of vegetables and $4.3 billion worth of fresh fruits from Mexico. Losing those imports would hurt U.S. consumers, especially lower-income consumers, as fruit and vegetable prices would rise with a trade war, Sheldon said.

Losses from Other Trade Agreements

Failing to ratify the Trans-Pacific Partnership (TPP) would likely cost the United States in terms of potential growth. The Peterson Institute projected a $130 billion increase in U.S. gross domestic product (GDP) by 2030 from that agreement. GDP is one of the primary indicators to gauge the health of a country’s economy.

The United States would also miss the chance to open up the Japanese agricultural market, which USDA projected would account for 68 percent of the increase in agricultural imports among TPP countries. Overall, the agreement was expected to increase U.S. agricultural exports to the TPP by $2.8 billion.

The TPP would also have reduced more than 18,000 tariffs, including many on agricultural products, Sheldon said.

“The TPP was the template of how modern free trade agreements should be written. We’re throwing away the opportunity to write the rules,” he said.

“A trade war is unambiguously a bad idea,” Sheldon said. “Hopefully we will see some legal and political checks on trade plans.”

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