Trade War Cost Stock Prices $1.7 Trillion
Donald Trump often measures his performance in the White House by how the stock market performs. Unfortunately, by that measure, his trade war with China has failed. New research by economists from the Federal Reserve Bank of New York and Columbia University found U.S. companies lost at least $1.7 trillion in the price of their stocks due to increased U.S. tariffs against imports from China.
On March 1, 2018, Donald Trump moved forward with his first significant step in a trade war with China by imposing tariffs on steel and aluminum, which included tariffs on Chinese imports. In July 2018, the Trump administration imposed 25% duties on imports from China, followed by 25% tariffs on more products from China in August 2018, and a 10% tariff on $200 billion worth of goods from China in September 2018. In 2019, more tariffs followed. The tariffs had an impact on U.S. company stock values because it turns out, tariff increases are a form of industrial policy that loses money for U.S. companies and investors.
“We find that U.S. and Chinese tariff announcements lowered U.S. aggregate equity prices in our sample of close to 3,000 listed firms by 6.0 percentage points: a $1.7 trillion reduction in market value for our sample of listed firms,” according to new research by Mary Amiti, an economist at the Federal Reserve Bank of New York, and Sang Hoon Kong and David Weinstein, both economists at Columbia University. The study noted that 3.4 percentage points of the 6.0 percent decline in equity prices “can be attributed to the common effects” [effects that matter in general to companies] and “2.6 percentage points can be attributed to the differentially poor performance of firms importing from, exporting to, or selling in China.”
To conduct the research, the economists identified 11 “candidate” events: “U.S. tariff events, Chinese retaliation events, and other trade war-related events that do not involve U.S. or Chinese tariffs. Our first event is the March 1, 2018 announcement of steel and aluminum tariffs (which also targeted China). We classify this event along with the March 22, 2018 event, the September 17, 2018 announcement of tariffs on $200 billion of Chinese imports, and the May 10, 2019 announcement of the increase in tariffs of those imports from 10 to 25 percent as ‘U.S. tariff’ events.”
The research found U.S. tariff announcements caused most of the reduction in U.S. market values. Announcements by China of retaliatory measures had “small effects.” One reason for this may be that the U.S. tariff announcement was the surprise event, not the retaliation. Moreover, fewer U.S. exports go to China than Chinese imports come into the United States, which means retaliatory tariffs have less of an economic impact. And, finally, the researchers note, “Chinese retaliation may have been priced into the reactions to U.S. tariff announcements.”
Tariff increases affect U.S. consumers, companies, and shareholders. A September 2019 National Foundation for American Policy analysis concluded, “By our calculation, from 2017 through the end of 2018, the Trump tariffs cost the average U.S. household $374. In 2019, the cost per household increased to $461 annually,” if the tariffs remained in place through the end of the year.
Less examined has been the trade war’s impact on U.S. investors, including members of the public who own stocks directly or through mutual funds and retirement accounts. “Our study finds that the U.S.-China trade war depressed stock prices, which implies negative impacts on firms and their shareholders,” economics professor David Weinstein told me. “Shareholders lost money, and the lower returns to capital causes firms to invest less.”
The study likely underestimates the negative impact of tariffs. The economists measured the effect on companies publicly traded on the stock market. “This means that the national impact might be more negative if unlisted firms, e.g., farmers, were also adversely affected on average or less negative if the tariffs caused new entry into protected sectors like steel and aluminum.”
The study did not look at foreign multinational companies, which invest in the U.S. economy and employ many U.S. workers. Another issue: “We can only estimate the impact of the unanticipated component of the announcements. This means that to the extent that markets anticipated the trade war, we are likely to have underestimated the effects.” The study also did not address trade disruptions outside of tariffs.
What should we learn from the research about the impact of the trade war with China? “An important lesson for policymakers is that the trade war had a much broader and larger impact than what one might surmise based on the relatively small share of firms importing or exporting to China,” said Weinstein. “Since much of the escalation of the trade war occurred in 2019, a substantial portion of the estimated negative impact on investment growth rates is going to be felt this year.”
There is a reason the stock market generally has declined when Donald Trump raised tariffs on U.S. consumers and companies that purchase goods from China – tariffs are bad for business. Tariffs harm investors, including Americans who own stocks or invest money in mutual funds. When politicians claim to be “tough” on trade with China, it turns out the people most likely to be harmed are Americans.