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Will Tariff Smoke Clear or Is It the Fog of Trade War?

Will Tariff Smoke Clear or Is It the Fog of Trade War?
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Wednesday, 20 June 2018 08:17 AM Current | Bio | Archive

Trade War I: Heating Up.

Wars can start as a result of tit for tat. This expression describes the inability of either side to back away from conflict, for fear of being perceived as weak.

That certainly describes the behavior of the US and China in their recent confrontation on trade:

(1) January. It started on January 17, when the US imposed tariffs on Chinese steel. On January 22, the US imposed tariffs on washing machines, which are mostly imported from Mexico but with some parts made in China.

(2) February. On February 14, the US imposed anti-dumping duties on cast-iron pipes from China. On February 27, the US imposed anti-dumping and countervailing duties on aluminum foil from China. The Chinese commerce ministry complained about the foil tariff the next day.

(3) March. On March 8, the US imposed tariffs on forged steel fittings made in China. On the same day, Trump approved stiff tariffs on imported steel and aluminum. On March 20, tariffs were imposed on stainless steel flanges from China (and India too).

On March 22, the US Trade Representative (USTR) recommended 25% duties on Chinese products. On March 23, the US filed a complaint against China with the World Trade Organization (WTO) about protection of intellectual property. Also on March 23, China announced tariffs on $3 billion of US goods (including fresh fruits, nuts, wine, and pork) in response to US duties on aluminum and steel.

(4) April. On April 3, the US released a list of $50 billion of Chinese goods that faced tariffs. China responded with a 25% levy on 106 US products (including soybeans, automobiles, chemicals, and aircraft). On April 4, China filed a complaint about US tariffs with the WTO.

On April 5, Trump instructed the USTR to “consider whether $100 billion of additional tariffs would be appropriate” and to identify which products to apply this to in response to China’s “unfair retaliation.” The next day (on April 6), China’s commerce ministry warned that the nation would retaliate if the latest US threat were implemented. (For more, see Bloomberg’s timeline through April 6.)

On April 10, Chinese President Xi promised to encourage “normal technological exchange” and to “protect the lawful ownership rights of foreign enterprises.” On the same day, the WTO released a statement from China claiming that the US duties on steel and aluminum imports violate WTO agreements.

During mid-April, the Chinese government promised to end foreign ownership caps on electric vehicle, shipping, and aircraft manufacturing in China. However, the concession was accompanied by a 178% duty placed on US sorghum crops.

(5) May. As a part of talks held during early May, the US presented China with a list of trade demands, including a reduction in the bilateral trade deficit by $200 billion with a deadline of 2020, up from previous demands of $100 billion in the next year, reported the 5/4 FT.

On May 20, Treasury's Steven Mnuchin said: ”We are putting the trade war on hold. Right now, we have agreed to put the tariffs on hold while we try to execute the framework.”

On May 22, China reduced its import tariff on autos from 25% to 15% starting July 1 in what the WSJ called “a concession to U.S. trade complaints,” adding “but the move is likely to pay the biggest benefits to German auto makers and Chinese consumers.” Import tariffs on auto parts will also be cut.

On May 29, the White House said that it would announce by June 15 a final list of $50 billion in imports from China that would be subject to 25% tariffs to be implemented “shortly thereafter.” The $50 billion may be the first part of a total of $150 billion in Chinese imports to face tariffs, confirmed the White House. Restrictions intended to prevent Chinese acquisition of US technology are to be announced by June 30.

(6) June. During weekend talks in early June, China offered to purchase nearly $70 billion of US farm, manufacturing, and energy products. That was short of the previous US request for a plan to reduce the US merchandise trade deficit with China by $200 billion. Chinese officials made it clear that the offer would be void if the US moved ahead with the tariffs expected shortly after June 15. The June talks ended without settlement.

On June 14, President Trump approved a list of tariffs on $50 billion in Chinese goods, Bloomberg reported. It was released on June 15 and covered 1,102 categories of goods aimed at Chinese strategic plans to dominate new high-technology industries. Trump said that the US would respond with more tariffs if China retaliates.

That very same day, China’s State Council announced it would levy penalties of the same rate on the US goods of the same value. In retaliation, China expanded the list of US products that would be subject to tariffs from 106 to 659 types of goods. The tariffs on US goods are scheduled to begin on July 6, the same day as the first round of US tariffs are set to be implemented.

On June 18, Trump ordered the identification of $200 billion in Chinese imports—such as toys tools, and t-shirts—for incremental tariffs of 10% and on more goods if China retaliates. In effect that could drive Beijing to penalize US imports beyond tariffs, as the US exports about $150 billion in goods to China, observed the WSJ.

Trade War II: Noise Drowning Out Signal. I stand corrected: Yesterday, I wrote that it is hard to imagine that a bear market top was made on January 26 since there’s no sign of an imminent recession. However, Trump’s protectionist saber-rattling has led to multi-front trade skirmishes with America’s major trading partners. Now Trump threatens to up the tit-for-tat ante with an incremental 10% tariff on $200 billion of Chinese imports. He did so Monday evening. The Chinese immediately said that they would retaliate in kind.

This may all be Trump’s art of the deal-making. However, bullying the Chinese in public rather than negotiating with them in private is risky. The longer that the noisy dispute continues, the more it could harm global economic growth as businesses postpone spending until the smoke clears. The biggest risk, of course, is that the smoke is actually the fog of war. Trump’s approach risks escalating the trade skirmishes into an all-out trade war, which would depress global economic activity. Now let’s try to tune out the noise of war and find some peace and quiet:

(1) Forward earnings. Notwithstanding all of the above, Joe and I continue to focus on the strong signal coming from S&P 500/400/600 forward earnings (Fig. 1). All three rose to record highs in mid-June.

The forward earnings of the S&P 500 is up to $168.40 per share, quickly approaching our target of $170 for the end of this year (Fig. 2). Barring an all-out trade war, that level seems easily achievable, since forward earnings will equal the consensus expectation for 2019 by the end of this year. That expectation has been rising ever since the cut in the corporate tax rate at the end of last year. It was $176.94 in mid-June.

(2) Forward revenues. We guess that industry analysts haven’t gotten the trade-war memo yet. Their forward revenues estimates for the S&P 500/400/600 continued to climb to fresh record highs in mid-June (Fig. 3). The upward slope is particularly steep for both the forward revenues and forward earnings of the S&P 600 SmallCaps.

(3) Profit margins. The S&P 500 forward profit margin continues to rise in record-high territory (Fig. 4). It was 12.2% in mid-June, up from 11.1% during the December 14 week, just before Trump’s tax cut.

(4) Bottom line. Our bottom line is that while the noise continues to drown out the signal, the signal remains strong enough so that stocks have held up quite well despite the noise of war. We expect that the noise will diminish as the mid-term congressional elections approach. Trump can’t afford to lose the House, especially to Democrats aiming to impeach him. He also needs the economy to remain strong and the bull market in stocks to remain intact.

Trump never learns from his defeats because he never admits that he has been defeated or stalemated. Instead, he pretends he has won and moves on (“Won-and-On Don”). He may very well do the same with the Chinese, accepting their initial concessions—as noted above—and moving on. He did that with North Korea, which remains a nuclear power despite Trump’s summit with NoKo dictator Kim Jong-un. But Little Rocket Man hasn’t launched a missile since late last year.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
Wars can start as a result of tit for tat. This expression describes the inability of either side to back away from conflict, for fear of being perceived as weak.
tariff, smoke, trade, war, fog, trump
1468
2018-17-20
Wednesday, 20 June 2018 08:17 AM
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