If President Donald Trump fails in his promised fundamental reorganization of trade, the U.S. economy is likely to suffer as the stimulus from his tax cuts and spending hikes fades. | Alex Wong/Getty Images Trade Dark clouds hang over Trump’s trade war The president is heading into a reelection battle with his promise of challenging China unfulfilled.

President Donald Trump is doing everything he can to soften the economic blow of his trade battle with China, doling out billions of dollars in farmer bailouts and telling Americans that the Chinese are paying the tariffs he’s slapped on U.S. importers.

It’ll be a tough trick to execute, especially if Trump can’t cut a deal and the fight escalates to a full-scale trade war. All available evidence so far suggests it is American businesses and consumers — not the Chinese — paying Trump’s tariffs. And the farm bailout is running into political and logistical headaches.


If the president moves ahead with 25 percent tariffs on everything China exports to the United States, it could amount to a tax hike of more than $2,000 on the average American family, swamping the reduction they won from Trump’s signature legislative achievement — the 2017 tax law.

“It’s sort of like when you have a bad leak in a boat and you are trying to plug it up,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s, of efforts to ease the pain of a trade war. “Water is going to win every time. The impacts from the trade dispute with China, especially if it snowballs from here, are going to be felt and there is going to be a lot of pain. And I don’t think the federal government can catch up to it.”

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Trump came into office vowing to fundamentally reshape the U.S. economy. But the economy he has overseen so far has been propelled largely by tax cuts, deficit spending and deregulation, the traditional hallmarks of a Republican president.

Now he’s left with a fundamental reorganization of trade — especially the U.S. relationship with China — as one of his biggest unfulfilled promises. If he fails, the economy is likely to suffer as the stimulus from his tax cuts and spending hikes fades.

The pain will be felt most acutely by lower-income voters who rely on cheap imports and Midwestern farmers who make up critical slices of Trump’s political base and will help decide the outcome of the 2020 election.

Trump’s central political narrative so far has been that the tariffs he’s levied — now at 25 percent on over $200 billion in imports — are being paid by the Chinese, money he’s said he will use to aid farmers now largely unable to sell soybeans, pork, sorghum and other products into the Chinese market due to retaliatory tariffs.

But studies done so far using actual data on prices for American businesses and consumers show that the opposite of Trump’s argument is true.

“The strong conclusion is that so far, U.S. consumers have borne substantially all of the tariff increase,” Deutsche Bank chief economist Michael Spencer wrote in a recent note analyzing available data.

The Peterson Institute for International Economics estimates the China tariffs amount to a tax hike of about $550 per American family. If Trump goes to 25 percent tariffs on over $500 billion in Chinese imports — hitting nearly every category of consumer goods from clothing and diapers to electronics — it could mean a $2,200 tax hike on the average family of three. By contrast, Trump’s tax cut gave middle-income families a tax cut of about $800, according to the Tax Policy Center.

Recent polling data also suggests Trump’s messaging about how his tariffs are good for America and bad for China is not breaking through. A Fox News poll out last week found that by a margin of 11 points — 45 percent to 34 percent — Americans think the tariffs will do more to hurt the economy than help it.

Just last week, retailing giant Walmart warned tariff increases will cause prices for consumers to rise. An analysis by CNBC found that revenue from Trump’s China tariffs, now estimated at around $72 billion, would amount to the largest tax hike as a percentage of the economy since 1993.

All of that comes against a mixed consumer backdrop. The Commerce Department last week said retail sales dropped 0.2 percent in April as consumers reduced spending on clothing, appliances and other items, a potentially worrying signal for a U.S. economy driven mostly by domestic consumption.

But consumer sentiment rose to a 15-year high in the University of Michigan‘s consumer sentiment index out last week, highlighting the whipsaw nature of recent data — and what Trump stands to lose if the trade war spins out of control.

Price hikes are not limited to retailers directly hit by the tariffs. Much as gas stations hike prices when they see others doing it, competitors of those selling goods hit by tariffs often raise their own prices to match those of tariffed goods.

“The costs of U.S. tariffs have fallen entirely on U.S. businesses and households, with no clear reduction in the prices charged by Chinese exporters,” analysts at Goldman Sachs wrote in a note last week. “Second, the effects of the tariffs have spilled over noticeably to the prices charged by U.S. producers competing with tariff-affected goods.”

If the China trade war escalates, Goldman estimated the hit to economic growth could be as much as 0.4 percent — worse if the stock market takes a big hit. Trump is banking much of his reelection campaign on delivering growth of over 3 percent in 2019 and 2020, and such a hit would make it much harder — if not impossible — to get there.

Trump has also made a rising stock market a key metric of his own success, repeatedly touting new highs. But stocks often sell off when it appears China talks are going poorly. The Dow Jones Industrial Average is down around 1,000 points since peaking last October. While most Americans are not directly impacted by daily stock market gyrations, any big declines should the China trade war escalate would amount to a direct hit on Americans’ confidence, as well as a shot to Trump’s own ego.

In the farm sector, Trump is invoking the patriotism of those hit by China’s retaliatory tariffs and promising billions in bailout money to make up the difference in lost exports. The Trump administration last year set aside roughly $12 billion in aid for farmers in the first assistance package. About $9.5 billion was in the form of direct payments to farmers and ranchers. Another $1.2 billion was used to purchase surplus commodities to donate to federal nutrition programs and food banks.

Now it’s planning between $15 billion and $20 billion worth of financial assistance in response to the latest U.S.-China tariff escalation. U.S. agricultural products, of which the U.S. is a net exporter, have been in the crosshairs of countries slapped with tariffs, as governments search for ways to retaliate and hit Trump where it hurts politically.

Farmers — also hit by Trump’s trade battles with Mexico, Canada and the European Union — complained that last year’s aid was insufficient to deal with lost export revenue and crashing commodity prices. And many don’t want to rely on the government.

“Many farmers are really uncomfortable with the word ‘bailout’ and taking this help,” said Bovino.

The aid program has also been hit by problems including a report last week that $62 million went to a Brazilian meatpacking conglomerate owned by a pair of brothers who have confessed to bribing government officials in Brazil. The administration also drew fire for using bailout money to buy ham products from pork producer Smithfield, which is Chinese-owned.

Farm state Republicans have largely backed Trump’s tariff battle with China, but that support may not last indefinitely.

“There is great anxiety among farmers about it,” said Senate Finance Chairman Chuck Grassley (R-Iowa) in an interview. “But also the same farmers that have the anxiety know that China has been cheating the rest of the world for a long period of time and it's got to stop.”

China has a history of targeting politically sensitive areas when it retaliates against the U.S., and the Chinese are highly attuned to Trump’s vulnerabilities heading into his reelection campaign.

Some of the farmers hardest hit by the tariffs are deep in red-state Trump country. Iowa is likely to be a swing state in 2020, as are other states in the Midwest hit by retaliatory tariffs including Ohio, Michigan and Wisconsin.

Democrats, meanwhile, sense a strong opportunity to roast Trump’s farm bailout program. The president is in effect borrowing money from the Chinese, who are big buyers of U.S. debt, to pay farmers who would otherwise sell to China.

“Trade is one of Trump's strongest issues. It helped him win over those Obama voters in 2016,” said Dan Pfeiffer, who served as communications director under President Barack Obama. “Democrats have a golden opportunity to erode a key strength by hitting him hard on a poorly executed trade war.”

Adam Behsudi contributed to this report.