President Donald Trump has placed additional tariffs on roughly $200 billion of imports from China.
The official White House statement reads: “… The tariffs will take effect on September 24, 2018, and be set at a level of 10 percent until the end of the year. On January 1, the tariffs will rise to 25 percent. Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports…”
So, the serious burden of additional tariffs or taxation of $200 billion worth of goods partially made in China has been placed on the shoulders of the U.S. consumer.
However, someone does appear to have explained to the president that the tariff is indeed a consumer tax.
It might be helpful keeping in mind that the 10 percent tax will probably not take effect until after the end of the year anyway and certainly will not hit with full force before the mid-term elections in November.
About 300 tariff lines were scrubbed from the preliminary July tariff target list. Now, Smart watches and Bluetooth devices were removed from that tariff list, along with bicycle helmets, high chairs, children’s car seats, playpens and certain industrial chemicals.
Trump has also threatened an immediate escalation if China dares to retaliate. Anyway, the Chinese Vice Premier Liu He, President Xi Jinping’s top economic adviser, convened a meeting this morning in Beijing to discuss the government’s response to the U.S. tariffs.
It may also be worth keeping an eye on U.S. Treasury auctions in the coming weeks and months while the nuclear option of China selling U.S. Treasuries is unlikely, it certainly is possible that China fails to appear on a bond-auction or two in America just to remind the United States there are consequences and that the balance of payments is a two-way flow.
The tariffs or tax will slow growth in the United States. To be clear, taxes are going up and raising taxes will nearly always slow growth. The questions are: “When” does growth slow and “By how much” will growth slow?
The “when” depends on inventory levels and how quickly the tax is passed down the supply chain? About 4 months is a reasonable working estimate, but it could be sooner.
The “how much” question depends on how disruptive this is to supply chains?
There is also the question of “who's next”?
If U.S. consumption of all goods "partially made in China" is taxed, then there is nothing left for the president to tweet about with regards to China.
That may mean that the Trump Twitter feed is directed toward another target like Europe, Japan or Canada.
In the meantime, markets have priced in quite a lot of this already. The damage to U.S. corporate earnings is limited at the moment but escalates with the increased tax and would escalate with an increase in the amount of the tax as well.
Of course, the impact is both via supply chains and via the hit to U.S. domestic demand that will come from a reduction in real disposable income.
Ideas of massive relocation of production to the United States are, at least in the near term, sensible but there could be some switch in production to other countries in order to evade the tariffs.
Remember that this is not a tax on "goods made in China." It is a tax on "goods partially made in China."
Therefore, it is generally only part of the production that will have to shift.
Finally, while data indicate the tariffs so far have had little material impact on the $20 trillion U.S. economy, the latest levies also include more manufacturing inputs and boost the risk that businesses will become warier about investment and hiring, which along with lower taxes has been a pillar of support for household consumption in 2018.
Interestingly, Bloomberg reports that economists at UBS Group AG say even a 10 percent tariff will slow the U.S. economy in the fourth quarter by enough to stop the Fed from hiking interest rates again in December.
Assuming retaliation from China, the tariffs could shave about 0.4 percent from U.S. GDP in 2019, more than the 0.1 percent that was estimated earlier, and the drag is set to become even be worse given the tariffs will rise to 25 percent.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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