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Consumers Won't Ignore Trump's China Tariffs Forever

american trade tariff in the US as a stamp mark as an economic import and exports

Monday, 10 December 2018 12:55 PM Current | Bio | Archive

Financial markets continue to focus on trade concerns as there is a real risk of the U.S.-China trade disputes could escalate and because of that the risk of yet more tariffs from the Trump administration are real.

U.S. Trade Representative Robert Lighthizer said yesterday he considers March 1 a hard deadline to reach a deal on trade with China, and that new tariffs will be imposed otherwise saying: “As far as I am concerned it is a hard deadline. When I talk to the President he is not talking about going beyond March. The way this is set up is that at the end of 90 days, these tariffs will be raised … We need agricultural sales and we need manufacturing sales. We need structural changes on this fundamental issue of non-economic technology transfer. The demands are similar to those made under previous Democratic and Republican Presidents, but he felt Trump’s willingness to go beyond “dialogue” and impose tariffs will produce results.”

In the meantime, China's Foreign Ministry has summoned the U.S. and Canadian ambassadors to protest the detention in Vancouver, Canada of Meng Wanzhou the CFO of Huawei Technologies.

China's Foreign Ministry said the U.S. actions had violated the “legitimate rights and interests of Chinese citizens and are extremely bad in nature and that China will take further action based on the U.S. actions.”

The U.S. government alleges Huawei used a Hong Kong-based subsidiary called Skycom as a shell company to circumvent U.S. sanctions on Iran.

So far, the U.S. consumer has largely ignored the president’s tariff increases, but investors should better keep in mind that the earlier tariffs have been relatively easy to evade.

The risk is that if more and more goods should become subject to tariffs, the U.S. consumer will start to react and that will then change the economic outlook.

The labor market may be helping the U.S. consumer in the meantime although job creation has slowed in the United States, the suggestion is that is due to a lack of labor supply rather than a lack of labor demand, which in turn would suggest higher income growth in the future.

On Friday, the Labor Department’s November jobs report showed that there were 1 million more job openings than unemployed in the U.S. in October while the unemployment rate remained at a near 50-year low.

The Fed’s Rate Path

Last week investors got a lot, for not saying far too much comments on the so-called “yield curve” and what it could imply for the economy.

At these confusing and difficult times for investors, I still remain in the camp of those who believe that the Fed will remain on its gradual tightening path next year unless a serious “distortion” would occur.

I agree with Jan Hatzius of Goldman Sachs who wrote in a “report” to investors: “We think that markets have overstated the extent of the shift since early October for three reasons. First, markets put too much weight on Powell’s comment that “We’re a long way from neutral at this point, probably”; we don’t think this was meant to imply a more hawkish view than the dot plot. Second, many commentators misleadingly shortened Powell’s formulation that interest rates remain “just below the broad range of estimates of the level that would be neutral for the economy” to “just below…neutral”. Third, the Fed’s message on the state of the economy, the growth outlook, and the positioning of gradual rate hikes is essentially intact.”

China Trade Data

China's export growth slowed sharply in November to 5.4 percent year-on-year (y/y), decelerating from a 15.6 percent increase in October and missing the consensus of 10 percent. Imports expanded 3.0 percent y/y, down from a 21.4 percent increase in the previous month, but also missing the consensus of 14.4 percent growth.

The slowdown was not primarily the fault of the United States however, instead Europe saw weaker imports.

OPEC Oil Production Cut

OPEC’s promise to cut oil production further should provide some support to the price of crude oil.

On Friday, OPEC did agree to cut by 800,000 bpd, led mainly by Saudi Arabia, while non-members promised to cut by 400,000 bpd, with most of that decrease shouldered by Russia.

So far today, the price for WTI crude oil is down from its close on Friday but remains above $50 per Barrel while the price for Brent crude oil is also down but remains above $60 per barrel.

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

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So far, the U.S. consumer has largely ignored the president’s tariff increases, but investors should better keep in mind that the earlier tariffs have been relatively easy to evade.
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Monday, 10 December 2018 12:55 PM
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