Tags: trade | tariff | economy | risk

I Must Admit That Risk of Trade War Is in the Air

I Must Admit That Risk of Trade War Is in the Air
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Monday, 12 March 2018 11:12 AM Current | Bio | Archive

On Friday, the Bureau for Labor Statistics gave us exceptionally strong February nonfarm payrolls that rose 313,000 in February, which was the strongest monthly increase since July 2016, and which came in after a 239,000 January gain and a 175,000 December rise.

The unemployment rate held steady at an expected 4.1 percent for a 5th straight month.

Average hourly earnings rose 0.1 percent higher (2.6% y/y) following unrevised gains of 0.3 percent and 0.4 percent in the prior two months.

Yes, these are good numbers notwithstanding that many would have liked somewhat stronger average hourly earnings.

Now, for the investor it should be absolutely clear that “average hourly earnings” are not wage growth.

Wage growth is communicated by the Atlanta Fed's Wage Growth Tracker, which is a measure of the nominal wage growth of individuals. Therefore, average hourly earnings are not called wage growth. Average hourly earnings are influenced by things like the types of jobs available, self-employment trends and whether the weather is warm or cold. None of these things are wage growth.

For knowing where we stand with wage growth we have the Atlanta Fed's Wage Growth Tracker indicated that, on March 6, the 3-month moving average of median wage growth was 3.0 percent, which was down from the 3.7 percent we got in September 2017, but still not disappointing.

Market observers will have to wait and see if this downward move will be confirmed or not over the coming months for having a better idea of what sort of impact wages could have on inflation further down the road.

Besides all that, on Thursday, President Trump signed at the White House two (2) extremely important Presidential Proclamations on Adjusting Imports of Steel and Aluminum into the United States, which will come into effect on March 23. Steel will have a tariff of 25 percent and aluminum 10 percent.

On steel, the Presidential Proclamation reads: “… this tariff is necessary and appropriate to address the threat that imports of steel articles pose to the national security.” The same is stated in the Presidential Proclamation on aluminum. Including the elements of “threat to national security” is, in my opinion, key to these proclamations.

The tariffs’ hikes on steel and aluminum will take effect within 2 weeks, which will make the United States a less efficient economy, although many may not realize that.

For now, Mexico and Canada, the 4th largest and the largest exporters of steel to the United States are exempt. Other countries may be exempt from the tariffs (tax increase) if they are, quote, real friends. Whether a country has to be a real friend of the United States or just a real friend of President Trump is not entirely clear. The U.S. softens stance on trade tariffs as President Trump promises flexibility for real friends.

Germany does not appear to be a real friend of President Trump. Their trade data with the United States that was published on Friday by the U.S. Census Bureau and shows for January a negative balance for the U.S. of $5,385.9 million dollars. For the full year of 2017, the negative balance for the United States was $64,252. - million

The problem of trade it’s the problem it has always been. The benefits of trade are broad but shallow. Americans benefit of having cheaper steel and aluminum are efficiently produced, which means cheaper “American made” Sports Utility Vehicles (SUV) and cheaper American beer cans than would otherwise be the case.

The costs of free trade are narrow but deep. American steelworkers are unemployed. The problem is that the benefits of free trade are largely invisible.

The Australian Centre for Applied Macroeconomic Analysis has recently published an interesting working paper under the title “Some Global Effects of President Trump’s Economic Program” written by McKibbin & Stoeckel who have calculated that a minor trade war where tariffs rise 10% across the board would cut global GDP growth by 1-4.5 percent, with the U.S. losing 1.3 percent, China losing 4.3 percent, Germany 3.8 percent. A 40 percent change in tariffs would cause a deep global recession.

Of course, this is not written in stone, but nevertheless, food for thought.

From my side and with what I know today, I still don’t think we are headed for “trade wars," but I must admit: “Risk is in the air.”

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

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On Friday, the Bureau for Labor Statistics gave us exceptionally strong February nonfarm payrolls that rose 313,000 in February, which was the strongest monthly increase since July 2016, and which came in after a 239,000...
trade, tariff, economy, risk
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2018-12-12
Monday, 12 March 2018 11:12 AM
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