The White House's Trade Policies and the Economy

A recent CNBC article by John Harwood, Peter Navarro says Trump’s trade policies are ‘good for the market,’ but economists aren’t buying it, applies two Penn Wharton Budget Model (PWBM) studies on the effects of tax cuts by industry and the probable effects of a trade war. The author analyzes the possibility that recent administration actions increasing protectionist measures would slow economic growth.

Harwood uses commentary and analyses from economists on both sides of the political aisle to substantiate his claim that the administration fails to understand the likely effects of the interactions between tax cuts, tariffs, and trade deficits. He quotes PWBM’s Kent Smetters as stating that a trade war "would more than eliminate any potential benefits from the tax cut." Figure 1 shows the short- and long-run effects of the tax cuts and a possible all-out trade war.

Figure 1: Effects of the Tax Cuts and Jobs Act and an All-Out Trade War on GDP

Figure 1.png

Note: Percentage change relative to current policy in 2027 and 2040, respectively. Projections are based on high return to capital. Under the Tax Cuts and Jobs Act the economy is modeled as 40 percent open, consistent with previous evidence. Under the All-Out Trade War the economy is modeled as 0 percent open.