WASHINGTON — President Trump’s chief economic adviser said on Sunday that American consumers would bear some pain from the escalating trade war with China, contradicting Mr. Trump’s claim that his tariffs are a multibillion-dollar, mostly one-way payment by China to the American Treasury.
The comments from Larry Kudlow, the director of the National Economic Council, came after the 11th round of trade negotiations broke off without a deal, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese products and begin a process to impose levies on nearly every product China exports to the United States.
“In fact, both sides will pay,” Mr. Kudlow said on “Fox News Sunday.” “Both sides will suffer on this.”
Mr. Kudlow’s acknowledgment of economic pain, while widely shared by economists, contradicted the president’s view that trade wars are easy to win and that the burden falls disproportionately on America’s trading partners.
Both Mr. Kudlow and the president say that a protracted trade war will ultimately be in the United States’ financial interest. Mr. Kudlow said that any pain would be worth the price if it forced China to treat American companies more fairly.
“You’ve got to do what you got to do,” Mr. Kudlow said. “We have had unfair trading practices all these years and so in my judgment, 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.”
Negotiations between the countries broke down last week after administration officials accused the Chinese of backtracking on several key provisions of a proposed deal, including agreeing to codify changes in Chinese law. Administration officials insist the talks have been constructive, and say they will continue; Mr. Kudlow said that could possibly include a meeting next month between Mr. Trump and President Xi Jinping of China at the Group of 20 summit meeting next month in Osaka, Japan. But Mr. Trump has muddied that message with tweets suggesting he would be happy to leave tariffs in place indefinitely.
Mr. Trump’s confidence in the strength of the American economy is fueling his decision to escalate the trade fight. But it is an economic gamble, one that could inflict lasting damage depending on how far Mr. Trump is willing to take his battle and what it produces in the end.
In a tweet on Sunday, Mr. Trump said the United States was “right where we want to be with China,” adding that the United States “will be taking in Tens of Billions of Dollars in Tariffs from China.”
Economists differ on how much the trade war will crimp economic growth, but most agree that the cost of tariffs is passed on to businesses or consumers in the form of higher prices on everything, including lighting fixtures and art supplies. Among the items covered by the administration’s latest increase in tariffs to 25 percent: computers, toilet paper, dog collars, Christmas tree lights and mattress supports.
The new tariff will not knock the American economy into recession, forecasters say, but it will hurt economic growth — and could do so drastically — if Mr. Trump follows through with his plan to place the tariff on all imports from China.
The United States imported $540 billion worth of goods from China in 2018, according to government statistics.
“Trump is dragging a dangerous misconception into a critical moment in his standoff with the Chinese,” Chad Bown, an expert on trade at the Peterson Institute for International Economics, said last week. “And American businesses and consumers stand to pay the price.”
Tariffs enacted last year reduced the inflation-adjusted income of American consumers by $4.4 billion each month by November, according to one study. That loss, which arose both from the tariff and from more expensive or foregone imports, breaks out to about $419 per household over a year. The latest round of increases will push the per-household cost above $800, said David Weinstein, a Columbia University economist and a co-author on the research.
Mr. Trump and his advisers insist his approach will ultimately pay off for the American economy — either by prodding China to open its markets and treat American firms more fairly, or by encouraging companies to shift manufacturing to the United States to avoid tariffs.
But the decision to prolong the trade war could upend economic projections that showed robust hiring, growth and investment this year, in part because of fading concerns about a protracted trade fight. And it could defy steady predictions by administration economists that Mr. Trump’s trade policy will help increase growth in 2019 to 3.2 percent — well above what most other forecasters expect.
“There is absolutely no question that these tariffs, if imposed and sustained, increase the probability of a recession,” Rob Martin, a former Fed section chief who is now an executive director at UBS, said of a potential escalation. “It makes you more vulnerable.”
Mr. Martin and his colleagues estimate that Mr. Trump’s latest increase could shave 0.25 to 0.35 percentage points off gross domestic product over six months. If the remainder of China’s products get hit with a 25 percent tariff, it could shave up to another full percentage point from G.D.P.
“If we move into that next tranche of tariffs, we’re in 100 percent uncharted territory,” Mr. Martin said. The products in that category are about two-thirds consumer goods and for many — which could include toys, bicycles and iPhones — it could be hard to find quick substitutes.
A prolonged trade war could inflict damage on China’s economy. Economic growth in China slowed in the second half of last year, in part because tariffs hurt business confidence. Since then, the Chinese government has poured billions of dollars into the financial system and pressed state-run banks into service extending credit.
Officials said last month that the economy grew 6.4 percent in the first quarter of the year, matching the pace from the previous quarter.
But Mr. Trump is clearly banking on a protracted fight to shift the economic calculus, warning China in a tweet that “a deal will become far worse for them if it has to be negotiated in my second term.”
While Mr. Trump is confident in his approach, his decision to add new trade barriers with China — in the form of higher tariffs — has confounded analysts and some business groups that have otherwise praised his handling of the economy.
Analysts at the Tax Foundation, a Washington think tank that forecast a large increase to economic growth from the tax cuts Mr. Trump signed in 2017, now say that the tariffs the president has put in place or threatened — and the effects of Chinese retaliatory tariffs on American exporters — would more than cancel out all the economic benefits of the tax law.
“The tariffs, if allowed to continue, will mute the economic benefits of tax reform,” said Nicole M. Kaeding, a Tax Foundation economist — particularly for low- and middle-income consumers who will be stuck paying higher prices. “Economists argue about many things, but the impact of tariffs on the economy is not debated. They are harmful.”
Many of those groups say growth would be even stronger this year if Mr. Trump had reached a deal with China and averted a prolonged government shutdown. They blame Mr. Trump’s fundamental misunderstanding of tariffs — which he believes are lifting the economy — for driving the country into a danger zone.
Analysts at Goldman Sachs said in a research note that further escalation of the trade war could reduce growth by nearly half a percentage point this year, and that “if trade tensions sparked a major sell-off in the equity market, the growth impact could worsen considerably.”
Stocks swooned last week but had begun to rebound by Friday afternoon. Financial conditions have tightened, but remain well below levels seen late last year.
“So far, U.S. markets don’t express a lot of concern — I think everybody expects a deal,” said Roberto Perli, an economist at Cornerstone Macro. “The risk is that time passes, nothing happens and the market realizes — maybe we were too optimistic.”
Mr. Trump has expressed satisfaction with “big beautiful tariffs” that he said were producing “billions of dollars” for America.
“I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers…great for U.S., not good for China,” Mr. Trump said on Twitter last week.
Of the $419-per-household cost of last year’s tariffs, most of the hit — $286 — came from the levy itself. Because the American government collected that money, it was able to redistribute it, including through a $12 billion program of farm subsidies. But that could change as the trade war persists.
“It’s pretty likely that the tariff revenue is going to fall,” Mr. Weinstein of Columbia University said, as firms find themselves unable to shoulder the higher rates and stop importing from China. “We’re going to see a lot of supply chains shifting around.”
That means Chinese companies will also lose out as businesses buy more American-made goods or continue turning to other low-cost producers outside China, like Vietnam and Malaysia.
Mr. Trump’s shift on tariffs appears to have surprised Fed officials, who had been expecting the trade dispute to calm down. This month, the Fed chairman, Jerome H. Powell, told reporters at a news conference that risks to growth from trade policy had “moderated somewhat,” citing “reports of progress in the trade talks between the United States and China.”
It is unlikely that Mr. Powell and his colleagues will react quickly to the higher tariffs and renewed trade war. The Fed will most likely judge any inflation that comes from trade policy as temporary, and may want to see economic growth weakening before acting on it through a rate cut or other measures.
“The Fed is unlikely to act immediately, in part because it is unclear whether this drama will end in a deal, an all-out trade war or something in between,” said Krishna Guha, head of the Global Policy and Central Bank Strategy team at advisory firm Evercore ISI.
If the central bank does react, it is more likely that it would cut rates to offset the economic pain. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said at a National Association for Business Economics conference last week that the tariff increase could prompt a rate cut if higher costs cause consumers to pull back, “depending on the severity of the response.”
Mr. Guha concurred, saying that the Fed would not hesitate to react if there were signs of a real risk to economic growth. Instead, they will most likely “cut rates on insurance grounds, in particular given weak inflation.”