Abacus: How A Global Trade War Could Impact You
We are at war — but it doesn’t seem like it, does it? That’s because instead of dealing with enlistments, nuclear threats, and relentless propaganda, this war is about the power of goods, prices, and compromises. Depending on what side they are on, economists and advisers have either been labeling the catchy “trade war” as no more than a “trade dispute” or as a far bigger invitation for abandonment and dissent from the rest of the world. A trade war consists of two or more nations levying tariffs on foreign imports to offer an incentive to consumers to buy their domestic goods, benefiting the domestic workers and industries, thus lowering the trade U.S.’ deficits. President Trump invoked a long-forgotten Trade Expansion Act of 1962 to bypass Congress in making trade decisions, citing national security as the main reason to do so.
Officials of various industries have been grilled for their forecasts for the upcoming months following President Trump’s protectionist tariffs. The regions targeted by the tariffs are Europe, Mexico, Canada, and more pressingly, China. The objective has been to remedy the belief that Americans “are on the losing side of almost all trade deals,” and to bolster and boost American industries. However, the question that is bubbling in everyone’s mind is not so much about trade relations and the future of our international support; in the short term, what we really want to know is how does this affect us, if it does at all? To answer this question, let’s catch you up with all that has happened so far.
President Trump announced the first set of tariffs on January 23, which were meant to affect the imports of washing machines and solar panels. March began with the steel and aluminum tariffs of 25 percent and 10 percent respectively. The U.S. then granted the EU, Mexico, and Canada temporary trade exemptions; China was left out and thus imposed retaliatory tariffs on 128 U.S. goods, according to CNBC. There was hope for a settlement in May as Steven Mnuchin, U.S. Treasury Secretary stated that the trade war had been put “on hold,” to work towards agreements. The end of May saw the end of tariff exemptions on Europe, leading its leaders to reach out to the World Trade Organization (WTO) to safeguard their own metal industries against the tariffs. June 5 was the first time Mexico retaliated against the U.S.’ metal tariffs. Five days later President Trudeau stated that Canada would not be pushed around and is willing to levy equal duties against the U.S. June 14, the EU applies tariffs on $3.3 billion of U.S. products. The next day, Trump adds new tariffs to the list of Chinese imports, totaling $50 billion, targeting the issue of intellectual property theft, China retaliates the same. On June 19, Trump then threatens China on $200 billion of Chinese goods. More threats back and forth with Europe. Two days after Independence Day the U.S. sets 25 percent duties on $34 billion of Chinese goods, China retaliates the same. Finally, on July 20, Trump threatened to put tariffs on all $505 billion of imported Chinese goods.
All caught up now?
It is unclear whether more tariff threats will be made, or if even more countries will be targeted for their exports to the U.S. Furthermore, the global impacts are just as uncertain, as it is not clear whether either side will yield or strike up a compromise. Again, however, the question at hand is: how does this affect me? The implementation time includes a two-month process, including a public hearing scheduled for August 20 - 23, so consumers should not feel any drastic change other than slight price hikes for at least six months. Turning to market analyses, many officials in banks including Deutsche, claimed that they expect Q2 profits to be above expectations, although they admit to volatility in the global rates. One thing Alan McKnight warned of, however, was the disconnect between global markets and international news, such that making decisions dependent on political rhetoric and news headlines on story developments would be misleading due to all of the “noise.”
Another point to keep in mind, however, is the Fed’s new monetary policies. Trump responded with disappointment, stating that the higher interest rates increase the value of the dollar, thus offsetting any progress by the tariffs being levied abroad. With a stronger dollar, Americans are still capable of buying foreign imports regardless of duties set on them, making the tariff efforts redundant. Keeping the interest rates low, however, is more than likely to result in a recession, so perhaps we are better off with this current route. Almost ironically, the U.S. dollar index fell by more than 1.6 percent after the President’s comments, though not completely offsetting the higher interest rates.
As far as total economic outlook goes, Larry Kudlow, the Director of the United States National Economic Council, predicts that there will not be any recession until 2024. Other economists say otherwise. The World Bank still estimates that global growth in 2018 will reach 3.1 percent and most shareholders are still sitting tight.
As industries are being affected differently, investing should be done carefully at this time. With as much as a 20 percent tariff on imported cars and parts, U.S. car sales can drop as much as 10 percent, making stocks from companies like Ford and General Motors ones to stay away from. Additionally, a market which we all love and believe in, technology, may suffer as a result of the tariffs on Chinese imports, although as a sturdy industry, they may be able to weather the shocks. For instance, although Micron fell 6 percent, the fall only affected 1 percent of its sales. Still, perhaps keeping to investing in South Korea’s Samsung and SK Hynix may be more beneficial, according to Fortune. The truth is, the trade war is affecting far too many industries to account for specifically. A general rule to keep in mind is that large-cap stocks are the ones to avoid, according to Shawn Cruz, manager of the trading strategy at TD Ameritrade.
The individual consumer may be affected in this trade war right away, as higher costs brought on by increased tariffs on imports, could be passed down to them. For instance, industries that use steel and aluminum, such as automakers, may have to increase their selling prices instead of taking on the costs themselves, or, they may have to get rid of employees to lower their own costs. There is hope, however, as South Korea was not included in the steel tariff, and as the U.S.’ third-largest foreign supplier of steel, this could help. Nevertheless, it is more likely that U.S. consumers will turn to domestic producers instead.
The main long-term outcome of a trade war is a slower, less competitive economy. Consultants Oxford Economics predicts that a trade war could cost the global economy $800 billion, slowing down growth by 0.4 percent. Domestic industries are less likely to innovate as a result of no foreign competition and rationality dictates that the tariffs will have to come down at some point to ease international tension. If the goal has been to reduce import deficit with one nation, i.e. China, it is likely that if domestic industries do not become more competitive, the import deficit will be shifted to another nation, i.e. South Korea, who benefits from the ongoing trade war. The more salient lessons at this point of the ‘war’ are to watch your pockets, buy local, and be wary of American stocks.