Media reports suggest that President Donald Trump has signed off on a plan to defer U.S. tariffs on goods from countries with most-favored nation status for 90 days, to help ease the economic fallout of the coronavirus.
This will not cover all trade tariffs. The plan would not apply to tariffs on Chinese and European goods subject to Section 301 tariffs or to steel and aluminum subject to Section 232 tariffs, Reuters reported.
So, Americans who use the wrong things, especially those things that are partially made in China or Europe, will still have to pay U.S. tariffs/taxes.
Nevertheless, this will help, albeit only in part, the cash flow of U.S. companies. If some company is not paying tariffs/taxes to the U.S. Treasury, then they’ll have some cash to keep their business afloat. It does rather also emphasize the fact that the Chinese were in fact never paying the U.S. trade tariffs/taxes.
President Donald Trump is presumably not prioritizing the cash flow of Chinese companies in the current crisis. These tariffs were in fact a tax by Americans on Americans.
On the subject of trade, South Korea export numbers dropped 0.2 percent year-on-year (y/y) in March, compared with an increase of 4.3 percent y/y in February. As China returns to work after its lockdown, the data also signals the effects of the demand shock coming from the United States and Europe. The growth in exports weakened in the final 11 days of March as the lockdown started to take effect.
Investors should try to keep in mind that the coronavirus causes primarily a “demand” shock, so, it is not surprising that the new demand shock will have a larger effect than the fading of supply chain disruption.
There are still supply side concerns as well. Asia relies on Europe and sometimes on the United States for parts to make things to sell back to Europe and to the United States.
If the United States and Europe are both in lockdown, this will affect Asia as well.
Besides all that, today we got also a whole series of interesting Manufacturing PMI surveys of which some of them are mentioned hereafter:
- The Caixin China General Manufacturing PMI Survey states that the manufacturing sector operating conditions in China stabilized in March and rebounded to 50.1 from a record low in February of 40.3. Noteworthy is the fact that business resumption was insufficient, and worsening external demand and soft domestic consumer demand restricted production from expanding further.
- The IHS Markit U.S. Manufacturing PMI Survey came in at 48.5 in March, down from 50.7 in February while the manufacturing output slumped to the greatest extent since the height of the global financial crisis in 2009. Growing numbers of company closures and lockdowns as the nation fights the coronavirus outbreak mean that business levels have collapsed. It’s certainly not an overstatement to say that worse is likely to come as consumer spending is set to fall further in the coming months as lockdowns are set to intensify and unemployment to spike higher.
- The IHS Markit Eurozone Manufacturing PMI Survey came in at 44.5 in March, down from 49.2 in February and hints we are still some way off from peak decline for manufacturing. Besides the hit to output from many factories simply closing their doors, the coming weeks will likely see both business and consumer spending on goods decline markedly. Large swathes of manufacturing could see downturns of the likes not seen before.
Finally, Cleveland Fed President Loretta Mester said yesterday that reports measuring U.S. economic activity are likely to be “very bad” in the first half and the unemployment rate could rise above 10 percent due to efforts to slow the spread of the coronavirus. “How things play out really are going to depend on the course of the virus,” Mester said, Reuters reported.
For investors the guidelines are rather simple. There is still a lot worse to come. Therefore, the bottom is still not in sight…
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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