December 18, 2019

By Jeff Steagall, professor of economics

Earlier this month, President Trump announced the trade war could persist until after the presidential election next November. Delaying a resolution for another year could push the global economy into recession.

The dampening effects of the trade war are clear in certain sectors of the economy, notably manufacturing and agriculture. Utah firms have felt these pressures, too. Both sectors have experienced significant job losses since the trade war began, despite a strong U.S. economy and sustained overall job growth. Some small businesses have been hit particularly hard, since they and their customers have had to bear much of the effect of the tariffs in the forms of increased cost of merchandise and higher consumer prices.

However, these direct effects of the trade war might not be the worst of its consequences.

Consider how difficult it would be for the Utah Jazz to win a basketball game if the rules changed during the game. If the three-point shot were worth just two points sometimes, but worth three points at other times, what strategy could the coach employ to maximize his team’s chances? If other rules could change at the whim of the referees, playing to win would get even more difficult. The stability of the rules of the game is essential for coaches to devise strategies that players can execute to win.

The same is true for American firms trying to win in the global marketplace.

One of the key functions of government is providing a stable business environment. Extending the trade war for another 12 months or more is destabilizing, leaving companies uncertain about what rules will govern their participation in the global economy.

It is well-known that 21st century supply chains are global. Manufacturing firms have sourced production of various components of their final products throughout the world, in order to minimize production costs. Consumers benefit from lower prices. Firms and their owners earn more profits.

One goal of the Trump tariffs is to encourage firms to move production back onto American soil. If the tariffs were permanent (and that would be even more terrible), then perhaps firms would consider restructuring their supply chains and moving production and jobs home.

But the tariffs are known to be temporary. Why would a firm build a new factory in the U.S. if its leaders believe that the tariffs will return to normal levels soon? Because when they do, the incentive to produce abroad will be as strong as it was before the trade war began.

On the other hand, the uncertainty regarding the duration of the new tariffs (and the possible implementation of even more tariffs) puts CEOs in a conundrum. They are reluctant to invest. They delay hiring. They delay innovation. They hold onto the cash that would otherwise stimulate more economic growth in the economy.

That is a recipe for a recession.

For over two centuries, American firms have proven they are world-class competitors whenever they understand the rules of the business game. It is time to end the trade war, so U.S. companies can make the decisions that will strengthen their organizations, provide new jobs, and offer consumers lower prices.

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