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US economy barely nicked by 2018 trade wars as consumers take the strain: study

While some sectors were thrown into chaos by President Donald Trump's trade wars in 2018, the effect of resurgent protectionism was relatively modest for the U.S. economy, according to a new study aiming to quantify the financial cost of the policies.

The overall hit to the U.S. economy was $7.8 billion, or just 0.04% of GDP, in 2018, though the loss to U.S. consumers and producers from the higher costs of imports amounted to $68.8 billion, or 0.37% of GDP, said a working paper from the National Bureau of Economic Research, or NBER.

The 2018 trade actions started with U.S. import tariff increases on solar panels and washing machines early in the year and included an escalating battle with the Chinese that ended up targeting $247 billion worth of imports, according to the researchers. China, Canada, Mexico, the EU and other trading partners retaliated with tariffs of their own.

Agricultural and manufacturing exports to China were hit particularly hard. The U.S. Department of Agriculture authorized more than $12 billion in assistance to farmers and producers affected by tariffs in August 2018, including soybean, wheat, sorghum and corn producers. Automakers viewed China's temporary suspension of tariffs on American automobile exports as a success in December 2018, but analysts cautioned that move was only a temporary reprieve.

'Unprecedented' protectionism

"This return to protection is unprecedented in the post-war era due to the sizes of the countries involved, the magnitudes of the tariff increases, and the breadth of tariffs across sectors," the authors of the study wrote.

The NBER research said the new trade policies resulted in a 31.5% average decline in imports of certain products from targeted countries and an 11% drop in targeted U.S. exports.

The relatively small effect of the trade battle on U.S. GDP found in the NBER paper is largely in line with views of economists contacted by S&P Global Market Intelligence.

"Protectionism is generally bad for any economy, but the impact is not felt in a homogeneous way across the different sectors," said Gregory Daco, chief U.S. economist at Oxford Economics. "While the average impact might be fairly small and manageable at the national economy level, the disruptions to specific sectors, specific industries can be quite traumatic."

Jay Bryson, a global economist at Wells Fargo Securities LLC, said the service-oriented nature of the U.S. economy blunted the effects of the U.S.-China trade skirmish. "The United States is kind of an outlier in the sense of its relatively low exports-to-GDP sorts of ratios," he said, adding that smaller countries tend to have higher export ratios, which would increase the macroeconomic effect of trade tensions on those kinds of economies.

In 2017, the U.S. net deficit in goods was $807 billion, while the net surplus in services was $255 billion.

Confidence shaken

The more pronounced effects of trade tensions are indirect ones, as when business and consumer confidence is shaken. "If people are watching the stock market going down 15 to 20%, they may get a little bit nervous and they may hold back a little bit on consumer spending," Bryson said.

Businesses can have the flexibility and agility to adjust their supply chains to mitigate disruptions, but these kinds of disruptions can put a damper on business decisions in the interim, according to Daco of Oxford Economics.

Indeed, the authors of the NBER paper acknowledge that their study examines only short-term effects. "It does not consider long-run impacts, or margins such as investment that may respond to uncertainty," they said. "These remain important questions for future work."

Voter fallout

As for the potential political fallout from the trade war, while U.S. tariffs benefited sectors located in "politically competitive" counties, any gains will have been wiped out by retaliatory tariffs, the study's authors wrote. "We compute that tradable-sector workers in heavily Republican counties are the most negatively affected by the trade war," they said.

The NBER working paper, "The Return to Protectionism," was authored by Pablo Fajgelbaum of the University of California, Los Angeles; Patrick Kennedy of the University of California at Berkeley; Pinelopi Goldberg of Yale University; and Amit Khandelwal of Columbia University.