Unless you’ve been too busy rooting for your favourite FIFA team, then you’ll know that global markets are worrying over China and the U.S. – the world’s two largest economies – becoming aggressive with their tariff threats.
But first, what are tariffs?
Tariffs are additional taxes or duties a government usually imposes on imported goods.
The goal is to make locally-produced goods more competitive by making imports more expensive in the domestic market. If it works, additional profits of local companies could lead to more jobs and economic activity.
Why is Trump imposing/threatening tariffs now?
One of the key themes in Trump’s “America First” campaign is his promise to undo unfair trade practices made by the U.S.’ major trading partners.
Trump isn’t wrong about the trade imbalance. In fact, Uncle Sam’s trade deficit increased from $504.8B in 2016 to $568.4B in 2017, as imports increased more than exports. This translates to about 2.9% of the U.S. GDP, higher than the 2.7% figure in 2016.
It’s worth noting that China is on top of the “offenders” list, with Uncle Sam sustaining a whopping $375.2B worth of goods deficit in 2017, followed by Mexico with a smaller $71.1B deficit.
Which tariffs have been announced so far?
The POTUS announced last Friday that his administration will impose a 25% tariff on up to $50B worth of Chinese goods as punishment for China’s alleged theft of U.S. intellectual property.
The United States Trade Representative detailed that the U.S. will initially impose a set of tariffs on 818 items worth about $34B on July 6, while measures affecting 284 products worth about $16B could take effect following a review and public comment process.
China was quick to (exactly) match Trump’s efforts, announcing $34B worth of tariffs on 545 U.S. products also effective July 6. Beijing’s plan also involves a total of $50B worth of tariffs, this time on 659 products including politically-sensitive goods in agriculture and auto sectors.
No stranger to tough deals, the Donald fired back yesterday with a threat to impose an additional 10% tariffs on $200B worth of Chinese products.
Trump warned that the additional duties will be implemented “if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced.”
China has yet to match Trump’s latest threat, but China’s Commerce Ministry has warned that Beijing will fight back with “qualitative” and “quantitative” measures if the U.S. publishes its latest list of goods.
How can a trade war affect the markets?
While equities markets have (mostly) taken the tariff news in stride, analysts warn that the impact of an actual trade war likely won’t be felt for months, and that history isn’t on the side of U.S. equities.
The Smoot-Hawley tariff act passed in June 1930, for example, raised U.S. tariffs on over 20,000 imported goods. Thing is, the Dow Jones Industrial Average actually rose from June to August that year before it crashed. While the tariff act isn’t the sole reason for the crash, many say it factored in the longer-term bearish market sentiment.
President George W. Bush’s decision to impose 8% – 30% tariffs on steel products in March 2002 also caused trouble for U.S. equities. Equities fell until October and didn’t see its pre-tariff levels until after the tariffs were canceled in December 2003.
What’s next for U.S.’ trade policies?
Who knows? I doubt if even Trump’s team knows exactly what the POTUS’ longer-term plans are. However, Goldman Sachs offers three observations that might help understand Trump’s trade decisions:
In one of his campaign speeches Trump urged that “We must as a nation be more unpredictable” in our foreign policy decisions.
We certainly saw this when Trump backed out of the latest G7 communiqué which the U.S. had already initially signed on, as well as his hot-and-cold attitude towards leaders like Merkel, Trudeau, and Xi Jinping. For the markets, this could mean sudden policy changes that might change depending on who’s advising the President.
Deficit and specific industries
Trump’s international trade policies seem to focus on addressing Uncle Sam’s trade deficit. Not only that, but he also prioritizes particular industries in doing it.
Tariffs on the EU and NAFTA partners, for example, focused on steel and aluminum, while tariffs on solar panels and washers are nothing if not specific.
Negotiations are as important as the outcome
While much of Trump’s confusing decisions open up more ways to “win,” Goldman speculates that negotiations are as important to the Trump administration as the outcome. After all, headline-worthy tweets and updates keep Trump’s decisions in your news feeds, which also keeps the voters engaged.