Trade policy disrupts markets, but not investment

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How tariff hikes and trade policy tensions affected U.S. business capital spending in 2018
Calculations using data from the Business Uncertainty Survey, January 2019

Private sector Manufacturing
Percent change -1.2% -4.2%
Change in dollars – $ 32.5 billion – $ 22 billion
Survey responses 337 95

Altig et al .; Federal Reserve Bank of Atlanta Business Uncertainty Survey, Stanford, Chicago Booth

We estimate that tariff hikes and trade policy tensions reduced gross investment in 2018 by 1% in the private sector and 4% in the manufacturing sector. The broader response from the manufacturing sector makes sense, given the sector’s relatively high exposure to international trade. When constructing these estimates, we took into account the companies that increased and decreased their investments due to trade policy, and we weighted each company according to its size.

To estimate the dollar impact of changes in trade policy, we multiplied the percentage effects by the aggregate investment values. The resulting amounts for business investment in 2018, minus $ 32.5 billion for the private sector and $ 22 billion for the manufacturing sector, are quite small compared to the $ 21 trillion size of the American economy.

We also asked forward-looking questions about the potential impact of trade policy concerns on future business investment. Businesses expect somewhat larger, but still modest, effects of trade policy developments on their capital spending this year. (David Altig, Brent Meyer and Nick Parker of the Atlanta Fed; Bloom of Stanford; and I discuss our findings based on these forward-looking questions in more detail in a blog post for the Atlanta Fed, “Pricing Concerns and US Business Investment, Take Two.”)

How do we reconcile the small effects of trade policy developments on US corporate investment with their recently significant role in US stock market volatility? The answer has at least two parts. First, many companies listed on the US stock market, especially the larger ones, have significant business interests abroad. These interests include foreign production facilities that export to the United States, supply chains that cross China, and brand values ​​and distribution networks in foreign economies. Tariffs and trade war concerns endanger these business interests and reduce their value. This, in turn, lowers the value of the company’s equity in the US stock market, although it has little impact on the company’s domestic operations in the United States.

Second, our survey data may not capture the indirect effects of trade policy on domestic investment. For example, when US tariff increases weaken foreign economies, they also reduce demand for US exports. Investigated firms may attribute these declines in demand to overall economic conditions rather than changes in trade policy.

What should we expect for the future? Trade policy news and concerns will remain a major source of equity market volatility as long as the United States is embroiled in trade policy disputes with its major trading partners. Higher tariffs and uncertain trade policy prospects will also dampen domestic investment by US companies. But the effects on domestic business investment will remain small unless tariffs and other trade barriers escalate dramatically.

Steven J. Davis is William H. Abbott Distinguished Service Professor of International Business and Economics at Chicago Booth and senior fellow at the Hoover Institution.


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