Fox News host Chris Wallace on Sunday reminded Larry Kudlow, director of the National Economic Council, that Americans will be forced to pay for the tariffs that Donald Trump is putting on Chinese goods.
"It's not China that pays tariffs, it's the American importers, the American companies that pay what is in effect a tax increase," Wallace explained. "And oftentimes passes it on to U.S. consumers."
"Fair enough," Kudlow replied. "In fact, both sides will pay."
"If it's a tariff on goods coming in, the Chinese aren't paying," the Fox News host pointed out.
Kudlow insisted that China would suffer GDP losses.
"I understand that but the president says China pays the tariffs," Wallace said. "They may suffer consequences but it's U.S. businesses and U.S. consumers who pay." In fact (and Kudlow should have enough of a grasp of macroeconomics to understand this), an escalating trade war will result not only with a GDP losses for China, but for the US and the whole world as well. :
In a scenario where Washington puts tariffs of 25% on all imports from China, with Beijing retaliating in kind, U.S. GDP would take a hit of around 0.5%, he said, leaving the economy around $45 billion smaller by 2020 than in a world without tariffs. That would push real GDP growth — growth minus inflation — dangerously close to 1% by the end of 2020, he said.
China’s GDP growth would be reduced by around 1.3% in 2020, slowing to an unprecedented 5% annual pace, while world GDP would suffer a significant 0.5% loss (see chart below).
And then there’s the “extreme scenario” of full-blown, multilateral trade war. In this scenario, Oxford Economics modeled the impact of the U.S. putting 35% tariffs on all Chinese imports and 25% auto tariffs globally, 10% blanket tariffs on all other goods imported from the EU, Taiwan and Japan — with all countries retaliating in kind.
The firm calculated this would result in a 2.1% hit to U.S. GDP in 2020, pushing the economy into recession later this year. China’s economy would contract by 2.5%, while Europe and Japan would see average GDP losses of 1.5% and world GDP would be reduced by 1.7%.