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Rare-Earths War, Tariff 'Taxes' Likely to Kill Economic Growth

Rare-Earths War, Tariff 'Taxes' Likely to Kill Economic Growth

 Brites99 | Dreamstime.com

By    |   Wednesday, 29 May 2019 10:17 AM

As U.S. equity markets in particular have shown yesterday, and as it has been said before and it’s worth saying it again, equities do not like being taxed with tariffs.

President Donald Trump’s trade tariffs are a tax on equities and in particular a tax on U.S. equities as, at least until now, it’s U.S. companies that pay the most of these tariffs/taxes.

Global supply chains can evade some of the tariffs/taxes but they cannot evade all of them. The weakness of equity markets in the face of these tariffs/taxes is not therefore surprising.

The escalation of the trade war also now increases economic uncertainty and that means that U.S. growth is likely to slip below trend this year. It could manage trend growth before the start of the month.

Yes, what a difference a couple of tweets can make…

China is now directly suggesting that “rare earths”* could be used in its trade dispute with the United States.

"China is seriously considering restricting rare earth exports to the US," tweeted the editor of Chinese state-run Global Times this week, Reuters reported.

Maybe it could be helpful to recall that around 80 percent of the rare earths imported by the United States comes from China, according to US government data.

*Rare earths are a group of 17 elements with similar properties, the BBC reported. Rare earth metals are used to manufacture everything from electric or hybrid vehicles, wind turbines, consumer electronics, energy technologies, oil refinery and the glass industry. The elements are also important because they are used in the defense industry. Twenty percent of rare earth demands are for use as permanent magnets. Permanent magnets can be used for a variety of applications including serving as essential components of weapons systems and high performance aircraft.

With this in mind, it is therefore not surprising that in the actual “uncertainties” and the lower growth environment bond markets are increasingly “supported,” which translates in higher prices for bonds and lower yields as a consequence of that, though it is far too soon to be talking about recession risks.

The U.S. consumer remains resilient. The University of Michigan's consumer sentiment for May rose to 102.4 in May from 97.2 in April, which was the highest reading since January 2004. Please take care that the data for the survey were recorded mostly before the trade negotiations with China collapsed and China responded with their own tariffs.

Besides that, trade tariffs/taxes are causing uncertainty for companies, not for the consumer, and the consumer is more important economically speaking.

It’s also worth noting that inverting a yield curve, which is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality, does “not” signal a recession. It can, but it certainly doesn’t have to.        

Besides all that, the U.S. Treasury just released its semi-annual report to Congress “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” wherein the U.S. “does not” designate China as a currency manipulator.

Nevertheless, the report states “China’s exchange rate practices continue to lack transparency, including its intervention in foreign exchange markets, and that China continues to warrant placement on the Monitoring List of economies that merit close attention to their currency practices”.

Interesting about the report is also that the U.S. Treasury has placed on its monitoring list in addition to China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam as the Treasury looks at the bilateral goods trade surpluses. The fact that Germany, Italy and Ireland all use the “euro” as their currency apparently didn’t play a role.

For the time being, equity markets remain in the red thanks to all the “uncertainty” that is in a lot of places where it shouldn’t be.

Investors should watch out for the existing danger that when all the uncertainties should cause “fear” in the markets.

Let’s hope it doesn’t come that far, but if that should be the case, it probably could create interesting buying opportunities. 

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors should watch out for the existing danger that when all the uncertainties should cause “fear” in the markets.
investors, fear, market, rare, earths
Wednesday, 29 May 2019 10:17 AM
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