Tariff Tiff, Round 3
Just as fast as you could say Smoot-Hawley Tariff Act of 1930 (This is the best description of the act – just watch the first 40 seconds), the U.S. - China tariff tiff entered Round 3 last week.
As a recap, here’s where we stand:
Pre-Match Trash Talk: In January, the U.S. imposes tariffs on solar panels and washing machines, which does not single out China by name. in early March, the U.S. put in place 25 percent tariffs on steel and 10 percent on aluminum.
Round 1: The Trump administration announced a 25 percent tariff on up to $50 billion dollars worth of imported Chinese goods. Beijing retaliated on last Monday, by imposing tariffs on nearly $3 billion dollars a year of American pork, fruit, wine and nuts. These tariffs are now effective.
Round 2: Last Wednesday, the U.S. said it would place 25 percent tariffs on 1,300 Chinese industrial technology, transport and medical products to force changes in Beijing’s unfair intellectual property practices. (It has been widely known that China engages in intellectual property theft and counterfeiting.) In turn, China said it would target about $50 billion dollars worth of 1,300 U.S. products, including soybeans, autos and aircraft. Round two will not take effect immediately. There will be a 6 to 8 week period during which U.S. and Chinese government officials will seek to find a path forward.
Round 3: On Thursday, President Trump said that the U.S. would consider tariffs on another $100 billion of Chinese imports, escalating the rhetoric and underscoring Trump’s hard line negotiating tactics. There has not yet been a Chinese response to this latest part of the tiff, but it is worth noting that there isn’t much more room to go. That’s because as of 2017, the U.S. exported just $131 billion worth of goods to China, while the U.S. imports $505 billion from China.
The Chinese could take a look at the service sector, where the U.S. operated at a $38.5 billion surplus in 2017. And one big advantage of operating a state-sponsored capitalist economy, controlled by a President for Life, is that the government can “suggest” (read: force) some of its manufacturers to stop working on assembling iPhones or raise the regulatory hurdles for U.S. firms to conduct business there.
What’s next?
According to Michael Pearce of Capital Economics, even “if implemented in full, the macro impact of both sets of tariffs would be small,” though he also notes that even a tiny increase in prices “would in effect be a tax on U.S. consumers, offsetting some of the boost to real disposable incomes from the income tax cuts.”
While both sides have every reason to strike a deal, investors are on guard for a further escalation, which would push up prices in both countries -- and the rest of the world. An increase in inflation could likely prompt central banks to hike interest rates, which would make borrowing more expensive and likely slow down economic activity. In other words, at the extreme, a full-blown trade war could trigger a global recession.
March Jobs Report:
With the hullabaloo about tariffs, you might have missed the results of the most recent employment report. The economy created 103,000 jobs in March, about half of what was expected, and the previous two months’ revisions amounted to 50,000 fewer positions than originally reported. That said, the economy has averaged about 200,000 new jobs per month in the first quarter, which is a pretty nifty feat as we enter the tenth year of the economic recovery.
The unemployment rate remained at 4.1 percent, which is where it has been for six months and wages advanced 2.7 percent from a year ago. Not great, but with prices up by just 2.2 percent, most American workers should have a little bit of extra money in their pockets.