Tags: tariffs | china | trump | companies | economy

Tariffs Hurt US Companies More Than American Economy

tariff stamp effect on united states capitol building
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Tuesday, 30 October 2018 08:46 AM Current | Bio | Archive

On Monday markets got the news the U.S. is preparing to announce by early December tariffs on “all” remaining Chinese imports “if” talks between Presidents Trump and Xi Jinping that “should” take place on the sidelines of a Group of 20 summit in Buenos Aires, Argentina at the end of November, but that hasn’t been officially confirmed yet, “fail to ease” the ongoing trade war.

If applied, the extended tariff list would apply to the imports from China that aren’t already covered by previous rounds of tariffs, which may be $257 billion using last year’s U.S. import figures.

As soon as the news got through, stocks erased gains partly on concern about the risk of an escalating U.S.-China trade war. The S&P 500 Index fell as much as 2.1 percent before paring the drop and ending the day down 0.7 percent.

Once again, unfortunately, we see a world of two economies.

On the one hand, all is for the best in this best of all possible worlds. The global economy is humming along quite nicely in terms of growth. The world is trading quite nicely with one another if you ignore the temper tantrum in the corner of the playground. Inflation is contained. Unemployment is generally low. The real cost of capital is low and, in all probability, is falling in most major economies.

On the other hand, “fear” stokes equity investors and market volatility.

Investors could do well taking note that “Bloomberg Economics” estimates that the drag on 2019 GDP growth could be about 1.5 percentage points assuming a tariff rate of 25% on all Chinese imports.

Still, multiple factors make such a drop unlikely, including prospects the U.S. might not go so far while China has various options to sustain growth.

By the way, this year, the U.S. has already imposed tariffs on $250 billion in trade with China. The “ten percent tariffs” on $200 billion in imports that took effect in September are due to increase to 25 percent on January 1.

Now, it’s also a fact that additional tariffs on imported goods from in China cause more problems for equities because most international trade is done by “listed” companies while the economy is generally less negatively affected.

It is also true that the complexity of modern supply chains means that tariffs can be at least partly evaded. This blunts the economic and ultimately the market effects of such tariffs.

Nevertheless, the success of the modern large corporations and by extension its share prices has generally been built on an assumption of being able to participate actively in the global economy.

If U.S. companies find that they and their customers are subject to tariffs when they try participating in the global economy, then equity volatility shouldn’t be a surprising result.

The underlying U.S. economy remains firm as it is far less affected by tariff increases.

Emerging Markets Remain Vulnerable

The MSCI Emerging Markets Index has seen its valuation tumble to levels last seen before the start of the $8 trillion upswing that started beginning 2016.

The MSCI Emerging Markets Index ratio of price to estimated earnings is now hovering just above 10 times, which is relatively “cheap,” no doubt about it, but that has come for a big part from the $4 trillion rout markets have experienced since the end of January this year.

For long-term investors, the big question today is if overall Emerging Markets are at price levels that make them interesting to buy.

I personally would remain patient and wait and see what happens with the U.S.-China trade war situation. If that escalates further, that would be another big “negative” for Emerging Markets overall.

Never forget, falling valuations are also a reflection of the loss of confidence in an asset class. The cost of equity capital, or the rate of return sought as compensation for companies’ perceived risks, remains high despite improved profitability making them safer (to some degree) for investors.

Yesterday, October 29, the MSCI Emerging Markets Index fell for a fifth successive day, taking its valuation to 10.01 times, which is its lowest level since March 2014.

No, any investor should try to keep in mind that cheap doesn’t mean necessarily “excellent” value.

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

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The underlying U.S. economy remains firm as it is far less affected by tariff increases.
tariffs, china, trump, companies, economy
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2018-46-30
Tuesday, 30 October 2018 08:46 AM
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