Fed arms Trump’s trade doves with evidence of tariff damage

New York: If President Donald Trump kicked off 2019 saying the US was reaping “MANY billions of dollars from the tariffs we are charging China,” the Federal Reserve had perhaps the year’s final say on the economic impact.

While many people celebrated the holidays last week, the US central bank published a study trying to quantify the effect of the disputes between the US and its major trading partners, particularly China.

The December 23 paper by Fed Board economists Aaron Flaaen and Justin Pierce concluded American tariffs had more costs than benefits for the sector they intended to help “- manufacturing. A Wall Street Journal editorial this week heralded the study as evidence that protectionism backfires and helps explain why economic growth has decelerated to 2 per cent from about 3 per cent.

The Fed paper is noteworthy for a few reasons. First, it came from an institution Trump has belittled and bemoaned for more than a year for keeping interest rates too high. It’s also the latest in a series of credible research that blows holes in arguments for import taxes just as the White House prepares to chalk up a trade win against China after nearly two years of tariff pressure.

Flaaen and Pierce’s research found that tariffs drove up the cost of inputs for American manufacturers. Combined with retaliation taken by trading partners, that led to a relative loss in manufacturing jobs and higher factory gate prices. Importantly, the study did not include the effects of trade-related uncertainty, which some economists believe has had the most significant effect on the US economy by contributing to a stalling in business investment.

A publication date so close to Christmas may have helped the paper avoid widespread attention, but it’s unlikely to have been missed by the doves on Trump’s trade team. While some of them may be relieved that phase one of a trade deal with China is set to be signed on Jan. 15, European Union trade chief Phil Hogan plans to be in Washington that same week hoping to convince the administration what the Fed has determined “- that tariffs ultimately do more economic harm than good.

Charting the Trade War

The offshore yuan approached the highest since August this week. The rally came amid easing trade tensions between the world’s largest two economies, with Trump saying he would sign a phase-one agreement on Jan. 15, though China has yet to respond.