Trump's Trade And Immigration Policies Could Wipe Out Tax Cut Benefits


President Trump and his allies in Congress promised that the Tax Cuts and Jobs Act (TCJA) would supercharge the US economy, leading to permanent annual real economic growth of 3 percent—well above last year’s growth rate of 2.3 percent or the projections of independent analysts such as the Congressional Budget Office or the Federal Reserve. But the negative economic effects of Trump’s highly restrictive trade and immigration policies threaten to overwhelm any benefit of the tax cuts.

In the latest round of his on-again, off-again trade war, Trump on Thursday announced a 25 percent tariff on steel and a 10 percent tariff on aluminum imported from the European Union, Mexico, and Canada. Earlier this week, he once again threatened new tariffs on Chinese products. The EU, Mexico and Canada, among our largest trading partners, immediately retaliated by imposing their own import taxes on a wide range of US products ranging from grapes to Harley Davidson motorcycles.

The effects of a trade war

While the president never has proposed specific immigration legislation, he has pursued a series of initiatives aimed at discouraging both illegal and legal immigration. In the short run, that means worker shortages. In the long run, it likely will sharply reduce the number of new workers in a rapidly-aging US labor force.

In an April economic letter, the Federal Reserve Bank of Dallas estimated the economic costs of steel and aluminum tariffs. While it assumed the taxes would hit the European Union and China, the analysis exempted  Canada and Mexico. Still, the design it modeled closely tracks the Trump initiative.

The result: The direct effects of the sanctions would reduce the level of US Gross Domestic Product by about 0.25 percent over the long term. It would boost US production of the metals by more than 15 percent, but cut exports by 5 percent and raise overall steel and aluminum prices by more than 20 percent.  Of course, including sanctions against Mexico and Canada--the largest exporter of aluminum and a major source of steel to the US—would strengthen those effects.

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