Analysis: Chief adviser Kudlow admits Trump is wrong on tariffs

By Aaron Blake | Washington Post

Whatever you think about President Donald Trump’s escalating trade war with China, he is billing it as something it’s not. He has suggested over and over again that China pays the tariffs, when that’s simply not how tariffs work. They are taxes on imports, paid by U.S. companies. And those costs are often passed down to consumers, in the form of higher prices.

It was a reality that Trump’s chief economic adviser tried to avoid Sunday – but couldn’t.

National Economic Council Director Larry Kudlow appeared on “Fox News Sunday,” where Chris Wallace pressed him on Trump’s factually incorrect claims about tariffs.

“Larry, that isn’t true,” Wallace said. “It’s not China that pays tariffs; it’s the American importers.”

Kudlow responded: “Fair enough. In fact, both sides will pay. Both sides will pay in these things.”

But that wasn’t sufficient for Wallace. So he pressed again.

“But the tariff on goods coming into the country, the Chinese aren’t paying,” Wallace said.

Kudlow again conceded that what Trump was saying was wrong: “No. But the Chinese will suffer GDP losses and so forth with respect to a diminishing export market and goods that they may need for their own – “

Wallace again cut in.

“I understand that, but the president says . . . that China – it pays the tariffs. They may suffer consequences, but it’s U.S. businesses and U.S. consumers who pay, correct?” Wallace asked.

Kudlow again conceded the point, but also tried to argue that China pays a price, too, because of lost exports: “Yes, to some extent. Yes, I don’t disagree with that. Again, both sides will suffer on this.”

Trump seems to have processed the fact that his own aide contradicted him. On Monday morning, he offered a slightly altered case for who pays the tariffs. This time, rather than saying China was paying them, he said U.S. companies could simply avoid them by not buying Chinese goods – the true intent of the tariffs.

“Also, the Tariffs can be . . . completely avoided if you buy from a non-Tariffed Country, or you buy the product inside the USA (the best idea),” Trump said. “That’s Zero Tariffs.”

But then Trump couldn’t help himself. He later attributed the relatively strong 3.2 percent annual GDP growth rate in the first quarter to his tariffs.

“The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China,” Trump said. “Some people just don’t get it!”

One of those people who apparently doesn’t get it: Larry Kudlow.

There was a lesser-publicized portion of the above interview in which Wallace presented Kudlow with some estimates of how much the trade war is costing the U.S. economy. Kudlow took issue with the estimates but proceeded to admit the trade war both cost jobs and hurt the gross domestic product.

“We reckon it would be about two-tenths of 1 percent of GDP,” Kudlow said. “So it’s a very modest number. We have a $20 trillion GDP.”

He added later that “I think this is a risk we should and can take without damaging our economy in any appreciable way.” And he said that “the economic consequences are so small that the possible improvement in trade and exports and open markets for the United States, this is worthwhile doing.”

But here’s the thing: “Two-tenths of 1 percent of GDP” isn’t really all that modest. With the current GDP around $20 trillion, that amounts to about $40 billion. That’s less than the other estimates Wallace brought up, but it’s still a hefty chunk of annual GDP growth – about 7 percent. If you lopped that off the GDP growth rate, you’d go from 3.2 percent to 3 percent.

There’s also the broader point of exactly how much this is directly hurting U.S. consumers.

The consumer price index for nine tariff-impacted categories took a sharp upturn since the tariffs were implemented while the prices of the other goods have continued a steady decline from before the tariffs were first implemented.

The point is not that Trump’s trade war is inherently bad – just that he has broadly misrepresented it. And now he has been roundly contradicted by his own top economic adviser. Kudlow admits that “both sides will suffer,” which means the United States will suffer – and is suffering. He says that suffering is part of playing the long game.

Trump, though, would like to argue that he’s also winning the short game. The problem is he doesn’t seem to understand how it’s played.