Friday, the European Union will start taxing a wide range of imports from the United States. Those new tariffs are in response to President Trump’s decision to impose tariffs on European steel and aluminum. Business Correspondent spoke with Rutgers professor Dr. Tom Prusa.
Schaffler: Professor, new EU tariffs on U.S. goods, everything from bourbon to Harley Davidsons to cranberries. What’s going to be the impact on New Jersey?
Prusa: I think in terms of this tariff, the fight we’re having right now, probably the biggest effect on New Jersey is actually going to be the tariffs that we’re putting on rather than the retaliation so far.
Schaffler: How so?
Prusa: Because the tariffs the United States are putting on largely on intermediate and capital goods, so it will be that New Jersey manufacturing firms are going to be having a hard time sourcing important inputs for their own production processes.
Schaffler: Meaning costs are going up for them, so just managing a business when you have to pay 25 percent more for goods is problematic.
Prusa: That’s right. And, in fact, what we’re seeing now in the early stages of the current tariff war is that prices in some sense are overshooting the tariffs. There’s so much panic in the market that we’re actually seeing prices rise by more than the level of the tariffs.
Schaffler: You said war. Is this an all out trade war the U.S. is in?
Prusa: We’re probably not there yet, but we are pretty darn close. The latest renouncement by the Trump administration that they might levy another $150 billion of tariffs on top of the previously announced tariffs. We’re getting into really uncharted territories, so it’s a very scary time for the trading environment.
Schaffler: I’ve seen numerous studies on the impacts of business. One says earnings growth could be knocked off, 1, 1.5 percent. It doesn’t sound like a lot, but it is when you run a business. I’ve seen another where two-thirds of executives say their businesses are going to be hurt by these tariffs, so how do you get out of this cycle that we’re in and will we see people lose their jobs over this?
Prusa: So how we get out of the cycle is we need responsible politicians to negotiate rather than just levy tariffs. That statement is not just applied towards Washington, this is around the globe. But, what we really do need is negotiation. Are people going to lose jobs? You cannot have the type of protection that are being announced and now being implemented without loss of jobs. This is almost unprecedented, the level of tariffs that not just the United States, but other countries are currently now ready to apply.
Schaffler: You said to me that this is a lose-lose situation.
Prusa: Absolutely. The idea that the United States will come out ahead and our trading partners will lose is a very naive view of how trade works and this is why I think you’re hearing so much from American businesses. They understand the importance of the supply change to their business in New Jersey and that’s what they’re concerned about.
Schaffler: This all started over concerns about trade deficits the U.S. runs with other countries. So, how do you fix that if it’s not through tariffs?
Prusa: So this is again where we need more sophisticated economic analysis, and apparently it’s being given in Washington right now. We cannot fully address trade deficit issues without addressing our serious lack of savings. We borrow hundreds of billions of dollars each year from foreign partners and that fuels the trade deficit, so until we get our fiscal deficit and actually personal borrowing down, we’re going to continue to have trade deficits.
Schaffler: And let’s not forget one of the biggest buyers is China of U.S. debts, so I wonder if a trade war can escalate into a more serious financial problem. If China decides, you know what we don’t want your debt anymore, doesn’t that put us in a worse situation?
Prusa: Absolutely, how China handles that decision given the amount of treasuries they own. But absolutely, this will lead into a rise in interest rates in the United States as China and other countries pull back their commitment to the United States.
Schaffler: Can we see the economy get impacted? The economy has been in pretty good shape when you look at the numbers.
Prusa: Absolutely. We already had a strong economy and then you add a huge tax cut to an already strong economy. Right now, the U.S. economy is very strong. And, yeah, we’re going to see that if we don’t resolve this trade situation without breaking out in an all-out trade war, we’re definitely going to have part of our growth cut.
Schaffler: And right now businesses are really powerless themselves doing anything. It’s up to the policymakers.
Prusa: Yes, I think it is, and I think they need to be unified in their demand in Washington not to basically put a hole in the boat and have water come in and sink what’s actually a very strong economy.
Schaffler: And, we’ve already seen Wall Street really take a hit from loses now from the market for the year and that’s over trade worries.
Prusa: I think it is primarily because the market is essentially flat for the year, and this is right after the largest tax cut in recent memory, 20 or 25 years. You would have thought it would have been just a booming year, and in fact it’s been a very flat year with possibility of considerable falling in the future.