This week Trump tweeted he would increase tariffs from 10% to 25% on USD500m+ of Chinese goods. Investors are worried that the additional tariffs hamper economic growth causing uncertainty and volatility in the market. US and Chinese trade officials will resume negotiations in Washington this Thursday/Friday to try for a trade deal. The proposed higher tariffs are scheduled to take effect right in the middle of the trade talks.
Outcomes from ‘One Term Trump’
As a result of his lack of power, President Trump has become more and more extreme in his actions in an attempt to show power. The stoush with North Korea is another attempt by the Presidential office to show external strength to be seen as more powerful. His tariff wars with the world the same.
Trump is saying tariffs lead to growth in Q1 for the US economy – adding 1%. He is looking at just 2 months; generally subject to significant revisions. But both imports and exports are headed in the right direction for Trump. But Lets dig into the details:
– Most of the rise in exports was restocking in soybean as a good faith tactic by China. Purchases grew by 45% after falling 50% the previous quarter! This alone accounted for more than 65% of the growth in exports. Sustainable?
– Most of the fall in imports was due to overstocking ahead of tariffs brginning followed by no buying in Q1. Sustainable?
What is it really all about?
Trump has blamed the trade deficit with China ($US419 billion in 2018) as the main reason for job losses in the American manufacturing sector. Somehow he has missed the structural benefit caused by the difference in wages and efficiency, not to mention the fact that they have been importing deflation for decades.
Is it about technology transfer or IP theft? Maybe. It is definitely about a show of power, but could it be that Mr Trump’s tariff is to maintain his voters support in Midwestern industrial and farm states. Remember he will be seeking re-election next year.
Tariff giveth and taketh away
Tariffs increase the prices of imported goods into the US. Where US producers are competing against imports, they no longer need to be as price competitive (or efficient) due to the tariff induced increase the prices of imports. Good for local producers (and perhaps jobs)! Not so good for consumer prices. Where the tariffs are on goods not produced in the USA it just leads to an increase in the price to end consumer.
So far, the signs are that tariffs added 0.1% to consumer prices. These proposed new tariffs will add another 0.3% to prices. Perhaps consumers will begin to notice this more.
Don’t let the facts ruin a good story
Technically tariffs added to growth. But in reality, they are likely to reverse and show the truth tariffs raise prices to the consumer.
What we can draw from all of this is a period of uncertainty. Again, the geopolitical machinations bring the winds of change. The average person has little hope of keeping up with this, let alone being able to predict the affect upon their investments. Pythagoras is a provider of incorruptible mathematical recommendations you can trust. Read more on www.PythagorasInvesting.com or get in contact with Michael@pythagorasinvesting.com
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