Trump's Trade War Is A Tempest In A Teapot

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I am baffled by the amount of media coverage given to President Trump's targeted tariffs. So far these trade wars amount to a tempest in a teapot.


I have said it many times and I will say it again - nobody wins in a trade war. But the biggest loser is always the biggest exporter. However, the media spin is out of proportion relative to the current economic impact. The Philly Fed in their monthly manufacturing survey asked how these businesses view the effects of recent trade policy on their costs, prices, sales, and profits.

At the outset of the survey, firms are asked how much of their revenue comes from foreign customers. About three-quarters of manufacturing firms and a little more than half of service firms in our surveys report having at least some foreign customers. While manufacturers largely export goods, service firms provide a wide range of offerings to foreign customers, ranging from tourism services to legal, financial, and consulting services.

Roughly two-thirds of manufacturing respondents indicated that tariffs have already had at least some upward effect on their overall input costs, and more than 70 percent anticipate that changes in trade policy will push up input costs in 2018 and 2019. Moreover, roughly half of manufacturing respondents expect trade policy to have an upward effect on their selling prices in both years. Among service sector firms, 44 percent are already seeing input price increases from tariffs, almost half see an upward effect on input prices in 2018, and well over half anticipate an upward effect in 2019. In addition to effects on prices, one in three manufacturers and one in four service firms see trade policy changes having a downward effect on sales to foreign customers in 2018. Sales to domestic customers are not seen to be affected, on balance.

Roughly 50 percent of manufacturers and 40 percent of service firms see trade policy changes as having a negative effect on profits in 2018. (Note that this does not necessarily mean that profits are projected to decline, only that they are expected to be lower than they otherwise would have been.) In addition to offering an assessment of the effects of tariffs and other trade policies on business costs and profits, a number of survey respondents commented that uncertainty about future trade policy has made planning and investing more challenging.

This post attempts to quantify the impact of the U.S. - China trade war.

The myth of free trade

Free trade usually gives consumers more choices in finding products of the best quality and lowest price. Free trade works if-and-only-if the playing field is level. A level playing field requires:

  • the same level of tariffs (hopefully zero) between the trading partners;
  • the amount of taxation on a product must be equal between the trading partners [As an example, many countries refund some or all taxes paid on export - so generally imports arrive in the USA with little tax paid whilst U.S. export products arrive with U.S. taxes paid];
  • governments should not provide beneficial treatment to exporters. Types of support includes low cost loans, subsidized payments to exporters, government ownership stake, and government contracts which tend to reduce overhead of the exporter;
  • exchange rates used between the trading partners must float.

Source:Pew Research Center

The cost of the tariff war to date is insignificant. The following graph shows the effects on the value of Chinese imports at various amounts and tariff levels which either has been implemented or kicked around:

  • no additional tariff (blue line)
  • $50 billion Imports with 10% tariff (red line)
  • $50 billion Imports with 25% tariff (light green line)
  • $200 billion Imports with 10% tariff (powder blue line)
  • $200 billion Imports with 25% tariff (purple line)

A table below summarizes the effects on China's $500+ billion in imports to the consumer. Note that total goods imports to the U.S. in 2017 were $2.4 trillion with China's component roughly 1/6th of total imports.

China 2017 Imports in millionsTariff cost per household per month (all things being equal)Cost per month for median household inflation at 2.9%Affect on Overall U.S. Tariff Rate from China Tariffs
Baseline without China Tariffs$505,470$0.00$145.001.6%
$50 billion Imports with 10% tariff$510,469$3.31$145.001.8%
$50 billion Imports with 25% tariff$517,696$8.09$145.002.1%
$200 billion Imports with 10% tariff$525,469$13.23$145.002.4%
$200 billion Imports with 25% tariff$555,469$33.07$145.003.7%

Will the consumers be able to see the impact of higher tariffs when being faced with the increase in costs due to inflation?

Free trade is a goal - and the world is far from achieving it. Even the U.S. government subsidizes farm products but has no problem criticizing the EU for their support of Airbus. There is obvious unfairness from all sides which needs to be addressed - and the use of small tariffs was a communication to trading partners to begin to address this unfairness is the correct sized hammer.

Other Economic News this Week:

The Econintersect Economic Index for August 2018 improvement cycle continues and remains well into territory associated with normal expansions. Our index is now at the highest level since December 2014. There are continuing warning signs of consumer over-consumption.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

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