Unless a deal is struck at the eleventh hour tonight, President Donald Trump will raise tariffs on $200 billion worth of Chinese goods to 25% on Friday, with additional tariffs on another $325 billion worth of goods coming “shortly.”
Trump’s threat is the latest shot fired in a now year-long trade war between the world’s two largest economies.
Such a move could have significant effects on Virginia’s economy and do particular damage to the state’s agriculture business, which is Virginia’s largest private industry and has already suffered due to Trump’s tariffs.
It’s not just Trump’s trade war with China that has hurt Virginia. His entire trade agenda, which includes another trade war with the European Union, withdrawing from the Trans-Pacific Partnership (TPP), and a renegotiated version of the North American Free Trade Agreement (NAFTA), present a threat to Virginia’s economy.
Impact on Virginia
According to the Virginia Department of Agriculture and Consumer Services (VDACS), agriculture is Virginia’s largest private industry and provides more than 334,000 jobs and $70 billion of economic impact each year.
Soybeans are Virginia’s number one cash crop, and China is one of Virginia’s biggest export market for agricultural goods. In 2017, soybean exports from Virginia to China topped $360 million.
But in retaliation to Trump’s tariffs, China issued a 25% tariff on soybeans, causing a 98% reduction in American soybean imports.
This has devastated soybean farmers in the Commonwealth.
In the aftermath of the tariffs, farmers found themselves with an excess of supply and soybean prices fell to a 10-year low and remain low even today. Things aren’t looking up, either. Trump’s new round of tariff threats sent grain markets plunging to a 42-year low.
Farmers aren’t the only ones affected by Trump’s tariffs, either.
Trump’s tit-for-tat tariff war with the E.U. has had significant consequences for the more than 70 distilleries across Virginia. The E.U.’s tariffs on bourbon and rye whiskey have cost distilleries hundreds of thousands of dollars.
The Catoctin Creek Distilling Co., a producer of rye whiskey in Purcelville, Virginia, had plans to increase exports and expand into Europe, but the tariffs “essentially decimated” the company’s European business, while also causing a hiring freeze at the distillery.
The aluminum tariffs have also impacted local breweries, such as the Amber Ox Public House and Virginia Beer Company, which have had to eat the cost of the price increase of aluminum.
Trump’s more restrictive version of NAFTA also poses a threat to Virginia. Since the original agreement was implemented in 1994, jobs in Virginia supported by international trade have increased by nearly 100% and more than one-in-five jobs in the state are now linked to international trade. In 2017 alone, Virginia exported more than $6 billion worth of goods and services to Canada and Mexico.
While the changes appear to be moderate enough that they shouldn’t significantly hamper Virginia’s economy, Trump’s continued stance on trade and embrace of tariffs has some Virginians, including former pro-trade Gov. Terry McAuliffe, concerned.
Now that we’ve explored how Trump’s approach to trade has affected the Commonwealth, let’s take a quick look at how we got here.
The evolution of trade
Trade has long been a divisive issue in America, but in the aftermath of World War II, as the world opened up, the United States’ embraced free trade.
The shift wasn’t just about the economy, but also American foreign policy during the Cold War era. Trade agreements helped bind together the world’s major democracies, ushering in the most prosperous era the world has ever seen and serving as a strong counterweight to the Soviet Union and China.
Fast forward a few decades to 1994, which saw the authorization of the North American Free Trade Agreement, which eliminated or reduced barriers to trade and investment between the U.S., Canada and Mexico.
Most economists agree NAFTA has benefited the American economy, but acknowledge that certain industries, such as auto manufacturing, have suffered. Critics of the deal argue that NAFTA is to blame for job loss, as the agreement led many American companies to outsource their jobs and move production to Mexico, where wages and costs are lower.
Broadly speaking, however, a majority of elected officials from both parties supported NAFTA and embraced free trade and globalization during the 1990s and 2000s.
In recent years, however, that consensus has fractured. As more and more jobs have been automated, outsourced, or simply done away with in the aftermath of the 2008 Great Recession, there’s been a rise in skepticism about free trade.
Prominent figures in both parties, including President Trump and Democratic presidential candidate Bernie Sanders, have attacked America’s trade policy, pointing to the loss of industrial jobs and decline of the Rust Belt and other, non-urban areas as a key consequence of deals like NAFTA.
Trump’s trade agenda
Trump ran on a populist trade agenda and promised to “Make America Great Again” by pulling out of unfair trade agreements, rectifying trade deficits and bringing jobs back to the United States.
Since taking office, he has withdrawn from the Trans-Pacific Partnership, a 12-country free-trade deal negotiated by former President Obama. Trump criticized the agreement and said it was bad for the country, but the other 11 nations proceeded anyway, cutting tariffs and leaving American businesses at a disadvantage.
He has also sought to renegotiate NAFTA, which he repeatedly attacked as one of “the worst trade deals” ever made.
In an attempt to reduce the gap between what the U.S. imports and exports, Trump pushed his administration to renegotiate the deal.
In November of 2018, the U.S., Canada and Mexico agreed to an updated deal, which is awaiting ratification from legislators in each country. While Trump has said the deal would dramatically improve the American economy, a recent government report found that the impact of the revisions would be modest.
His most controversial policies however have revolved around tariffs.
Last summer, Trump levied tariffs of 25% on steel imports and 10% on aluminum imports from the European Union and elsewhere, saying the imports were a threat to domestic production.
The U.S. tariffs hit some $7.5 billion of European goods and the E.U. responded by levying a 25% tariff on more than $3 billion worth of American products, including bourbon and rye whiskey, corn and Harley-Davidson Motorcycles. The E.U. also applied a 50% tax on shirts and pants made from cotton and synthetic fibers, sunbeds, washing machines, and some electronic devices.
The two sides have since declared a “truce,” delaying additional tariffs. Both sides intend to start negotiations towards a new trade deal, but the existing tariffs remain in place and tensions have flared again in recent weeks.
And then there’s China. Since Trump has tried to close the trade deficit with China, the two countries have imposed tariffs on roughly $360 billion of each other’s goods in the past ten months.
Trump’s trade policies have scrambled the traditional political lines on free trade, with some Democrats and Republicans embracing Trump’s agenda and others remaining vocally pro-trade.
One thing most officials agree on, however, is that a continued trade war will hurt the very people Trump has said he’s trying to help: farmers, coal workers, steel workers and other blue collar Americans.
However, many of these very people have already been squeezed by Trump’s trade war. Farmers have been particularly hurt by the tariffs, and while Trump tried to cushion the blow with a $12 billion aid package, farmers around the country continue to struggle.
Virginia is no different.
Trump has said that trade wars are “good” and “easy to win,” but that has not been borne out over the last ten months. And while Trump continues to negotiate with China, things have never been less certain for farmers and others affected by his trade agenda.
In fact, should the tariff battle continue, the economic effects will start to be felt by more and more Virginians.
If trade talks with China fall apart, the economy could potentially experience a recession. Economists at Moody’s Analytics, for example, expect Trump’s new tariffs would subtract 1.8 percentage points from G.D.P. growth and cause unemployment to rise.
Consumers are also likely to see increased prices if Trump’s new tariffs go into effect. Up until now, the tariffs he’s instituted have been on intermediate or capital goods, meaning they are used as parts of items sold rather than goods consumers buy directly. But the next batch of tariffs could change that and have a dramatic effect on consumers’ pocketbooks.
Ratification of Trump’s new NAFTA replacement, which he’s called the United States-Mexico-Canada Agreement, is also far from assured. Members of Congress, even those in Trump’s own party, have objected to continued use of tariffs on steel and aluminum imports from U.S. allies.
A continued trade war could also have severe political consequences for Trump ahead of 2020. He has repeatedly boasted about the economy, but a trade war-related downturn could hurt his support in key battleground states such as Michigan, Wisconsin and Pennsylvania.
While farmers, including those in Virginia, by and large continue to stand by Trump, Republican officials are growing increasingly concerned that a protracted trade battle might change the calculus in 2020.
How bad could things get?
According to U.S. Chamber of Commerce, Trump’s tariffs could cause “extremely significant damage” to Virginia, to the tune of $1.9 billion in exports that are threatened by the ongoing trade war, with the majority of those coming as a result of Trump’s battle with China.
We’ll find out soon enough (likely via Tweet) about whether Trump will institute a new round tariffs, but one thing is very clear: Damage has already been done, and Virginia deserves better.