- ‘Emotionally gratifying’ idea needs careful thought: Obstfeld
- Trump has vowed to impose tariffs on foreign imports
Donald Trump wants to slap tariffs on some foreign imports to help protect American workers. The International Monetary Fund on Thursday said that type of approach would hurt the U.S. economy.
Placing tariffs on imports can actually hurt the countries that levy the penalties, IMF chief economist Maurice Obstfeld said in a blog post, without mentioning Trump or any specific examples. That even applies when the countries targeted by the tariffs don’t retaliate, said Obstfeld, who served as an economic adviser to President Barack Obama before taking over as head of the IMF’s research department last year.
Trump, the Republican presidential nominee, has promised to impose tariffs on “any countries that cheat by unfairly subsidizing their goods.” He’s been especially critical of China, accusing its government of breaking trade rules “in every way imaginable” and vowing to declare China a currency manipulator.
“Those who promote ‘getting tough’ with foreign trade partners through punitive tariffs should think carefully,” Obstfeld said. “It may be emotionally gratifying; it may boost specific industries; the threat may even frighten trade partners into changing their policies; but, ultimately, if carried out, such policies cause wider economic damage at home.”
In an interview with MSNBC earlier this year, Trump said “when we get tough with China, they will stop devaluing their currency. ”
Obstfeld concedes that tariffs can bring relief to industries that directly compete with the producers of the targeted products. But the trade barriers would also be “broadly contractionary” to the home-country economy.
Why wouldn’t tariffs raise output by shifting demand to domestic producers, as some might expect? Because the expected improvement in the home country’s balance of payments would cause its currency to strengthen, dampening exports, Obstfeld said, pointing to work on the issue by Nobel laureate Robert Mundell.
The IMF’s own modeling confirms the effects, according to Obstfeld. If the U.S. imposed a 20 percent tariff on imports from emerging East Asian countries, real American gross domestic product would shrink by more than 0.5 percent within five years, according to calculations by the Washington-based fund. Over the same period, the U.S. dollar would appreciate more than 4 percent.
If the other countries retaliate, the hit to U.S. output would exceed 1 percent, with the dollar rising around 2 percent.