Lansing — President Donald Trump’s brewing trade war with China could cost the United States 200,000 jobs by 2021, according to a new forecast from University of Michigan economists.
Slapping 25 percent tariffs on Chinese products could reduce the roughly $400 billion U.S. trade deficit with the Asian nation by $25 billion, but the gains would be “undone” by slower investments and consumption as China retaliates with similar tariffs, said Daniil Manaenkov, a forecasting specialist with U-M’s Research Seminar in Quantitative Economics.
“Information processing equipment is suddenly going to get a lot more expensive,” he said, “and naturally there will be less investment. Some consumer goods will also get more expensive.”
By 2021, bilateral tariffs could cost the United States about 200,000 jobs and reduce the country’s gross domestic product by 0.3 percent, limiting potential economic growth, according to projections from UM’s Research Seminar in Quantitative Economics.
The forecast predicts overall consumer price levels would increase by 0.1 percent and investment prices would increase 1 percentage point.
Most of the products China exports to the United States are assembled there using products imported from other countries, Manaenkov told state lawmakers Wednesday during a biannual revenue estimating conference at the Michigan Capitol.
Experts are projecting continued economic growth nationally and in Michigan but highlighted various looming risks.
“If we slap significant tariffs just on China, world trade is simply going to relocate those stages of production happening in China to somewhere else,” he said.
Enforcing tariffs on Chinese imports could also be difficult, he added. A product assembled in China could be shipped to Vietnam and then imported to the United States “under a different flag.”
“A lot of Chinese imports will still make it here,” Manaenkov said. “Raising trade barriers against just one company is probably not going to produce a sizeable effect.”
While Trump has touted his budding relationship with Chinese President Xi Jinping, his plan to impose tariffs on $50 billion in Chinese products has sparked retaliatory threats that pose risks for American industries, including farmers in Michigan who grow soybeans or other agricultural export products.
NAFTA risk for autos
Trump has suggested that Xi may be willing to reduce China’s longstanding 25 percent tariff on automobile imports, but experts are waiting to see whether the Chinese president will follow through.
The United States imposes a 2.5 percent tariff on car imports and a 25 percent tariff on imported trucks. While Trump has suggested reciprocal tariffs, America could only do so “temporarily” without pulling out of the World Trade Organization, said Kristin Dziczek, vice president of research at the Center of Automotive Research in Ann Arbor.
Michigan is in a “very dangerous” position as the Trump administration works to negotiate the North American Free Trade Agreement with Canada and Mexico, Dziczek said, noting Trump has threatened to pull out of the agreement without new terms.
The 1994 agreement eliminated import tariffs on most products between the three countries, and Michigan is the top state in the country for auto exports, according to CAR data. Phase-in timelines in a recent U.S. proposal to increase the “regional value content” required for cars to avoid U.S. tariffs are “inadequate” and could hurt automakers, Dziczek said.
“If that hurdle is too high, people might just say, ‘I’ll pay the 2.5 percent (tariff),’” she said.
About 56 percent of all U.S. vehicle sales are domestically produced cars and trucks, including 30.8 percent by Detroit automakers and Tesla, according to CAR data. The other 44 percent are imported, with half of the total coming from Canada and Mexico.
Parts of a single car can cross borders multiple times, Dziczek said. “We don’t just trade parts and cars with Mexico and Canada, we build cars together,” she said.
Michigan economy growing
Light vehicle sales are expected to remain relatively flat in the next three years, according to UM forecasts. Total light vehicle sales could drop from 17.2 million in 2017 to 17 million this year and 16.9 million in 2019, they said.
Michigan’s prolonged economic recovery is projected to continue but jog growth will be “slower than earlier phases of the economic recovery,” said UM’s Research Seminar in Quantitative Economics director Gabe Ehrlich.
The state added 53,000 jobs in 2017 and is expected to add an average of 48,600 jobs annually between 2018 and 2020, a 1.1 percent growth rate, according to UM projections.
Experts in the Michigan Legislature and state Treasury are projecting similar economic growth for Michigan, but “obviously the potential tariffs and trade wars … do produce some uncertainty for our forecast,” said Jim Stansell of the House Fiscal Agency.
The national economy is set to grow in coming years and should get a boost from federal tax cuts signed by Trump in December. UM economists project the tax cuts should boost the nation’s gross domestic product 0.2 percent in 2018 and 2019 before tapering off in 2020.
A new federal budget act that authorized almost $300 billion in new spending in fiscal year 2019 should also lift economic output 0.2 percentage points in 2018, 0.3 percentage points in 2019 and 0.1 percentage point in 2020 — assuming Congress approves an enabling spending bill, Manaenkov said.
National consumer and business sentiment indexes, which measure optimism in the economy, are “sky high” and “rival what we saw in the late ’90s,” he said.