GOP Warns Trump a Trade War Risks Party's Chances in November

(Bloomberg) -- Republicans are warning President Donald Trump that a trade war with China would deal an economic blow to politically important areas of the country that will cost the party in November's congressional elections.

The president's proposed tariffs on a variety of imports are aimed at fulfilling a campaign promise to protect domestic industries slammed by globalization. But the impact of retaliation by China could drown out the GOP message that tax cuts are delivering prosperity, which the party is counting on to save their majorities in the House and Senate in what's already a tough election year.

“If tariffs and a trade war erase the positive economic impact we have seen from tax reform, it is a big, big problem,” said Michael Steel, a managing director at Hamilton Place Strategies, who previously worked for former House Speaker John Boehner.

The latest salvo came Wednesday from China, which announced $50 billion worth of tariffs on American products including soybeans, pork and aircraft in retaliation for Trump's plan to impose duties on 1,333 Chinese products. The biggest potential impact will be in rural areas that long have been part of the Republican base. Eight of the 10 biggest soybean-producing states went for Trump in the 2016 election and three of those will feature close Senate races in November.

Soothing Markets

Commerce Secretary Wilbur Ross argued that China's response won't disrupt the U.S. economy, and other administration officials said the world's two biggest economic powers still have time to back away from a trade war. That helped markets reverse early losses Wednesday as investors speculated the back-and-forth may not do much damage to global growth.

But many Republicans still were left with some dread of a potentially perilous road ahead.

“The problem is the potential for larger retaliation from China, and perhaps other countries, if it spills over. That's a huge fear,” said Douglas Holtz-Eakin, an economist with the American Action Forum, a research and advocacy group with close ties to the House GOP leadership.

Researchers at the Dallas Fed said in an analysis published Wednesday that the steel and aluminum tariffs that Trump previously announced, if fully implemented, would probably reduce U.S. gross domestic product by a quarter-percentage point over the long run. If the situation escalates to a trade war involving the U.S., China and the European Union, the disruptions could reduce GDP by 3.5 percent, according to the analysis.

‘Sensitive Electorates'

Holtz-Eakin said some of the responses from other countries to Trump's trade pronouncement put a target on “sensitive electorates.”

After Trump announced plans for tariffs on steel and aluminum imports, the European Union threatened to impose new duties on bourbon from Kentucky, the home state of Senate Majority Leader Mitch McConnell, and motorcycles made by Harley Davidson, which has its headquarters in Wisconsin, the home state of House Speaker Paul Ryan. Trump gave the EU a temporary exclusion from the tariffs. China's proposed retaliatory steps would hit hardest in farm states where Republicans dominate.

"That's all about making the Republicans hurt," Holtz-Eakin said.

Headwinds

If China follows through on its retaliatory tariffs, they'd be hitting just as campaigns are gearing up for the midterm elections that will decide control of Congress. Republicans already are confronting signs that Democrats have a solid chance to seize control of the majority in the House of Representatives, with Democratic voter disdain for Trump driving up turnout. At the same time, three of the most vulnerable Senate Democrats represent states that would be among the most affected by soybean tariffs -- Missouri, Indiana and North Dakota.

In an interview with Kentucky Today published on Wednesday, McConnell warned that 2018 will be a “challenging election year” for the GOP. “We know the wind is going to be in our face. We don't know whether it's going to be a Category 3, 4 or 5.”

Some Republicans are pleading with the president to ease off.

“It's my hope that the Trump administration will reconsider these tariffs and pursue policies that enhance our competitiveness, rather than reduce our access to foreign markets,” Iowa Republican Senator Joni Ernst said in a statement.

Iowa's other Republican senator, Chuck Grassley, said in a statement Wednesday that he warned Trump in February that tariffs on Chinese goods would cause China to retaliate against U.S. agriculture and “that's exactly what happened.”

Economic Issues

“The best thing the Trump administration has going for it is a strong economy,” said Doug Heye, a former spokesman for the Republican National Committee and House leadership who has been critical of Trump. “Talk of tariffs and trade wars may play well with part of Trump's base, but economic growth — job and wage growth — may ultimately be the only thing that can help stem a potentially disastrous midterm.”

The president tweeted Wednesday that a trade conflict with China has little downside for the U.S. given the current trade imbalance between the two countries. "When you're already $500 Billion DOWN, you can't lose!" he wrote on Twitter.

The defiant tone echoes his campaign-trail rhetoric that won him decisive votes in Midwestern states that are home to domestic industries that have been hammered amid increasing globalization and free trade policies. His success in the election revealed a substantial base of political support for an anti-trade platform. But many of those states also have substantial agricultural interests, which largely have benefited from trade.

The White House said Wednesday the president is playing a long game.

“We may have a little bit of short-term pain but we will have long-term success,” White House press secretary Sarah Huckabee Sanders told reporters Wednesday.

Trump's advisers sought to deliver reassurance despite his strong rhetoric. Ross, in an interview with CNBC said the U.S. isn't entering “World War III” and left the door open for a negotiated solution.

“Even shooting wars end with negotiations,” Ross said.

White House economic adviser Larry Kudlow emphasized the prospective nature of the president's trade moves.

“None of the tariffs have been put in place yet, these are all proposals,” he said in an interview Wednesday with Bloomberg News. “We're putting it out for comment. There's at least two months before any actions are taken.”

--With assistance from Jennifer Jacobs and Alan Bjerga

To contact the reporter on this story: Sahil Kapur in Washington at skapur39@bloomberg.net.

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, John Harney

©2018 Bloomberg L.P.