US dollar versus China yuan

What to Make of the 2018 “Trade War”

The past few weeks, we’ve finally seen evidence that the investment markets are getting jittery about the escalating tit-for-tat tariffs and threats of tariffs that some economists are calling “America vs. the World.”  Many investors are wondering whether new taxes on items flowing into and out of the U.S. really are something to worry about and the answer is a somber, “Yes.”

Tariffs are problematic on several fronts.

Problem #1: First and most specifically, certain economic sectors will suffer most in an escalating tariff battle.  When President Trump imposed tariffs on steel and aluminum imports, solar panels and washing machines, China responded with an equal dollar amount of tariffs on certain agricultural products, including soybeans, meat, fish, milk and cream, various fruits and vegetables, alcohol, dog and cat foot and cotton—all of which directly impacted the economics of many midwestern farmers (who China presumes to be Republican voters). Other tariffs imposed by China and the European Union on items like Kentucky bourbon, Harley-Davidson motorcycles, pork and maple syrup, will impact manufacturers and workers who probably reside on both sides of the political aisle.

Problem #2: The potential collateral damage, i.e. higher prices, reaches across a much broader spectrum of the economic landscape. If you’re a soybean farmer in Iowa, then the fact that Brazilian soybeans are now extremely competitive in the large and growing Chinese market can be extremely discouraging.  On the other hand, if you aren’t a soybean farmer or buying steel or semiconductors in bulk, you probably aren’t experiencing a lot of economic pain from the tariffs, for now.  That could change if the new 10% tariffs that the U.S. threatened to impose on an additional $200 billion of Chinese exports—along with added Canadian, Indian, Mexican, and a lot of European Union products.

Problem #3: Tariffs are already creating another “loser” in the war—American workers.  Harley-Davidson now plans to move some of its U.S. production overseas, firing American workers and hiring people in Europe, to keep its motorcycles competitive in overseas markets.  General Motors has estimated that the proposed tariff on car imports would eliminate 195,000 automotive-related jobs over the next three years—and if targeted nations retaliated with their own tariffs (as they almost certainly will), the number could rise to 624,000.  On a smaller scale, a Missouri nail manufacturer recently laid off 60 workers because it lost customers after it was forced to raise prices due to steel tariffs.

Who else loses?  What’s often forgotten in all the talk about free trade is that a tariff is a tax that must be paid by someone.  Who pays?

Problem #4: The cost is shared by manufacturers—at home or abroad—and the consumers who are buying those products. Many manufacturers will absorb some of those additional costs and new supply-chain expenses for components manufactured outside U.S. borders, which represents a new (and largely hidden) corporate tax.   Those costs not absorbed by the manufacturers will be passed on to consumers. For example, the additional $1,000-$5,000 cost of a new car represents tax revenue collected by the U.S. government some (most?) of which will be paid by the car buyers.

At the risk of sounding too melodramatic, I’ll caveat that it is certainly possible to overreact to the trade war scenario.  After all, $200 billion worth of goods represents less than 1% of U.S. GDP (bet you never thought you’d see $200 billion implied as a “drop in the bucket”!).  The tariffs will hit larger companies, which tend to sell their products around the world, much harder than smaller firms which market themselves to the U.S. domestic market.  From a foreign relations-perspective, other countries cannot be expected to back down; who wants to have a gloating U.S. President calling them a loser in his “war?” Some proponents of modest trade tariffs argue that the U.S. gives up too much (absolutely true, in some cases) and that institutions can adjust in a new tax environment (also true, but not all and not forever).

Few economists think that a trade war is good for the U.S. economy and neither political party is cheering these trade interventions.  The U.S. Senate is quietly moving forward on a bill jointly sponsored by six Republicans and four Democrats that would curb the President’s ability to unilaterally impose sanctions, which could become part of the next National Defense Authorization Act.

The question will come down to: how much is the average American willing to pay in new taxes concealed in the form of higher costs to “win” a trade war whose benefits to the global or U.S. economy are somewhat murky and historically unproductive?  The campaign rhetoric to protect American industries, tear up multilateral trade deals and force trading partners back to the bargaining table sounds great in an election.  But it doesn’t sound as good when restated as: pay more for food, beverages, appliances and cars, deprive farmers of access to foreign markets—and maybe lose your job in the process.

What should you do? We have the same advice as you’re considering any issue that gets a lot of hype in the media, that may (or may not) have a lasting impact on the economy/markets, and that you ultimately cannot control or impact:

1) Take an academic rather than emotional interest in the subject

2) Assess if the issue fundamentally changes any of your personal goals

3) If it doesn’t, then focus on those things that you can such as how much you save, how much you spend, how much risk you take, and where you choose to expend your mental energy

4) Take a deep breath and:

a. Take a walk on the beach with someone you love
b. Walk the dog (see item a. above!)
c. Play with your kids/grandkids
d. Help someone less fortunate that you are
e. Fill in the blank here with something that brings you joy

Wars of all sort will come and go. Unfortunately, so will the time and energy we have to share with the people and causes that are important to us. My best advice for you regarding these tariffs is not to let those “conflicts” that you can’t control steal you away from those personally rewarding and life affirming moments that you can. Adventure is out there!

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