'Playing with fire:' Economists warn the fallout of Trump's trade war is showing up and that things could get a lot worse

US president Donald Trump. Photo: Mandel Ngan/ AFP/ Getty Images.
  • The Trump administration has placed import taxes on hundred of billions worth of products so far.
  • Meanwhile, some key measures of American business conditions have weakened.
  • As tariffs raise costs and create uncertainty, economists say conditions could worsen.

As President Donald Trump maintains a flurry of protectionist policies, key gauges of American business conditions are cooling off.

The Commerce Department said Wednesday that orders for long-lasting goods fell 4.4% in October, the largest month-to-month drop in more than a year. The measure excluding military and aircraft equipment was mostly flat, compared with economists’ expectations for a modest gain.

The deceleration is at least partially due to rising protectionism and the uncertainty surrounding it, economists say. Trump has clashed with several countries on trade, including China and other big business partners. His administration has placed import taxes on $US300 billion worth of products so far, prompting retaliatory measures from major economies.

“Ignore the headline; the real story is that tariffs are hurting the core,” said Ian Sheperdson, chief economist at Pantheon Macroeconomics. “In short, the administration is playing with fire, and we’re beginning to detect the smell of burning in the air.”

The duties have rearranged global business relationships, with importers and exporters scrambling to minimise any negative effects of 10-25% tax increases. Trade tensions can also make it difficult for companies to forecast costs and demand, thus delaying investment decisions.

Trump, however, asserts tariffs will ultimately help defend the US against trade practices perceived as unfair. Reducing the trade deficit has been one of his signature promises since the campaign trail.

Moody’s economist Ryan Sweet noted trade isn’t the only reason for the recent slump in core capital durable goods orders. The measure could also be correcting after a run of strong results.

“Core capital goods orders were on a strong run over the past couple of years, therefore it was only a matter of time before they softened some,” he said.

Still, an Institute of Supply Management survey out earlier this month suggested October’s sharp slowdown in manufacturing activity was largely thanks to tariffs, as companies cited rising costs and shipment delays.

“We doubt the ISM survey will weaken much further in the short-term, but we can’t be sure, and any further intensification of the trade war would be potentially disastrous,” Sheperdson said in an email.

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