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Trump to Slap Tax on Americans by Imposing Tariffs on China

Trump to Slap Tax on Americans by Imposing Tariffs on China
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Thursday, 22 March 2018 07:03 AM Current | Bio | Archive

It is taxation day in the United States as media reports suggest that President Donald Trump will sign an executive order taxing the U.S. consumers who purchase Chinese products.

The process will almost certainly include a suitable number of photogenic American workers, smiling and applauding, a dramatic signature, and, of course, selective tariffs against China along with restrictions on investment and visas.

U.S. trade representative Robert Lighthizer, who is by the way a longtime advocate of greater U.S. protectionism, said the administration had developed a computer algorithm to help the U.S. trade office decide which Chinese products to hit with tariffs. The goal is to pressure China to change practices, he said, while limiting harm to U.S. consumers and companies.

At least, there is acknowledgment that Americans will be hurt in the process.

The problem is that that any algorithm is likely to be wrong because the data for global trade are highly complex and inevitably controversial. The latest trade data available in value added data, which is what really matters here in this case, is for 2011 (!).

On the other hand, the Trump tax increase may not be implemented immediately. That will allow time for American businesses to lobby against the taxes. Of course, time spent on lobbying is time that is not spent on improving competitiveness or building overseas markets, but never mind…

In addition, Lighthizer indicated that Europe and other key allies of the United States would not have their steel and aluminum sales in the U.S. taxed while they were negotiating exemptions from being taxed.

Meanwhile, the Federal Reserve did yesterday what it was expected to do. Rates were raised and the whole process was consistent with a further two rate increases, and not one as some see it, over the course of this year. That’s at least how I interpret Fed Chair Jerome Powell’s words.

Powell said as little as was possible on the details of the economy but suggested that future decisions would be data dependent. The idea of being data dependent comes from the “How to be a Federal Reserve Chair” handbook of course, but there is a slight problem in that it’s not really possible to depend upon the data. Data is revised more and more often, and with larger and larger revisions. This means that in real time, data is less and less dependable.

Powell gave some information during his press conference about the projected paths, as of yesterday (!), for the fed-funds rates: “Participants’ projections of the appropriate path for the federal funds rate reflect our gradual approach. The median projection for the federal funds rate is 2.1 percent at the end of this year, 2.9 percent at the end of 2019, and 3.4 percent at the end of 2020. By 2020, the median federal funds rate is modestly above its estimated longer-run level trend. Most participants revised up their projections since December, although the median projection for this year did not change. The medians for 2019 and 2020 are somewhat higher than in December.”

Notwithstanding this, I still believe we could see in total four (4) Fed funds rate hikes this year, which, if that were to be the case, and which is important to investors, the Fed funds rate would be at 2.50 percent by the end of the year and therefore, the real Fed funds rate using the present consumer price inflation (CPI) rate to discount would be about zero (0) percent, and he real Fed funds rate would be slightly positive using the GDP price deflator to discount. The deflator is the difference in prices between the current year and the base year chosen by the Bureau for Economic Analysis (BEA) for comparison.

Over in China, The People's Bank of China announced today an increase of 5 basis points in its reverse repo rate to 2.55 percent following the decision by the Federal Reserve to increase the federal funds rate. Officials characterized this move as consistent with previous responses to Federal Reserve rate adjustments.

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

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It is taxation day in the United States as media reports suggest that President Trump will sign an executive order taxing the U.S. consumers who purchase Chinese products.
trump, tax, china, tariffs
686
2018-03-22
Thursday, 22 March 2018 07:03 AM
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