US business fears choppy waters ahead due to Trump trade tariffs

The remorseless escalation of Donald Trump’s trade hostilities with key partners has yet to make a dent in the country’s buoyant growth figures — but anxiety is rising over the impact of his tariffs on US economic prospects. 

The central concern, say executives and economists, is not a sudden interruption of an economic expansion that is on track to deliver annualised growth of more than 4 per cent in the current quarter, but rather a steady and relentless drag on corporate earnings and spending that materialises over multiple quarters. 

A survey by the Business Roundtable conducted in May showed that 95 per cent of top chief executives judged foreign trade retaliation to be a moderate or serious risk, with 90 per cent warning about the risk of higher input costs. Those views were collected before Donald Trump hit China with a new round of tariffs on $50bn of goods and threatened further levies on a wider array of products. 

Carlos Gutierrez, the former Kellogg’s chief executive and commerce secretary in the administration of George W Bush who now chairs the National Foreign Trade Council, said his conversations with companies led him to believe that the trade tensions would start having a significant impact in the fourth quarter. The council represents some of the largest companies in the US.

“The parties that will be most impacted are US companies,” he said. “They are going to report bad earnings. It is going to hurt the stock market. Even worse we are going to put people out of work and it is going to spark inflation in our country . . . The logic of that is what companies throughout the country are feeling.”

The Trump administration insists the concerns are overwrought. Wilbur Ross, the US commerce secretary, speaking in a television interview on Thursday, dismissed US business fears as “hyperbole”, pointing to what he called a “booming” US economy.

But central bankers are also beginning to express concern. Jay Powell, Federal Reserve chairman, said at a conference in Portugal on Wednesday that he was hearing about decisions to postpone investment or hiring. “Changes in trade policy could cause us to have to question the outlook,” he said.

Recent precedents for such a sudden deterioration in America’s trading relationships are not easy to find. Barry Eichengreen, a professor of economics at the University of California, Berkeley, and an authority on the Great Depression, said the right analogy was not the imposition of the Smoot-Hawley tariffs during the 1930s, which occurred during a period of deflation and excess capacity — as well as a very different global trading system. 

A more useful parallel was the uncertainty about future trade relations generated by the UK voting to leave the EU in 2016, which he said had taken 12-18 months to show up clearly in the data. “Faced with that, British producers are holding off on investment. That is what could happen in the US with a trade war,” he said.

Companies are just starting to get to grips with the multiple ways in which they could be hit by new tariffs.

Bill Yeargin, president and chief executive of power boat manufacturer Correct Craft, has started reviewing his company’s expansion plans. Not only are his costs going up but most of the 1,000 boats the company exported last year went to the EU, Canada and Mexico, three economies threatening retaliatory tariffs on US boats.

The boat industry has seen costs rise on key inputs such as aluminium due to both new tariffs and what the Trump administration hailed this week as a historic “self-initiated” investigation into dumping of Chinese aluminium sheeting. Both have provoked higher prices for domestic aluminium, which Correct Craft uses. 

Also hurting costs are the looming tariffs against $50bn in Chinese imports which include products such as navigation instruments and small outboard motors. And then there is the shadow being cast by the question of how long any tariffs will last.

“No one wants to be the buyer who bought a boat during the six months that the tariffs were in effect,” Mr Yeargin said. Likewise, “we also don’t want to be the guy that built the factory right before the downturn”.

Other sectors are seeing ill-effects from earlier rounds of tariffs. The imposition in January of duties on imported washing machines has triggered an 18 per cent jump in prices of those products this spring, according to official inflation data.

Rising lumber prices, which have been driven higher by tariffs on imports from Canada, have increased the price of an average single-family home by nearly $9,000, the National Association of Home Builders said this week following a meeting with Mr Ross. 

Thus far, trade actions are still being dwarfed by the economic tailwinds provided by December’s $1.5tn tax cuts coupled with a public spending boost agreed this year. The tariff on $50bn of Chinese products that starts to take effect on July 6 is equivalent to a $12.5bn tax on US consumers, said analysts at Bank of America Merrill Lynch — less than a tenth of the tax cut. 

The recent trade actions are only the beginning, however. Mr Trump has threatened to impose import taxes on a further $200bn in Chinese goods within months. He also has ordered a national security investigation into the US’s $190bn in auto imports that could be even more disruptive given the car industry’s reliance on regional and global supply chains. 

In all cases economists say the Trump administration’s actions are likely to cause more lost jobs than they save or generate, as well as raising the risk of a painful stock market correction and wider loss of business confidence. 

Mark Zandi of Moody’s Analytics estimates that if Mr Trump goes ahead with his threatened 10 per cent tariff on an extra $200bn of Chinese imports, plus a 25 per cent tariff increase on vehicle imports, more than a fifth of all imported goods could be affected. 

Assuming a response from America’s trading partners, real gross domestic product could be shaved back by 0.4 of a percentage point, together with a 550,000 fall in employment at the peak of the effects. An across-the-board 10 per cent tariff on US-China trade could knock 1.3 percentage points off real GDP and cost 1.9m jobs.

“Higher prices for American consumers, less exports, lower stock prices, more uncertainty: it is an obnoxious mix of stuff,” Mr Zandi said.