Tags: trump | tax | trade | equities

Trump's Tax on Trade Is Tax on Equities

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Friday, 08 February 2019 09:41 AM Current | Bio | Archive

National Economic Council Director Larry Kudlow said on Fox Business yesterday that President Trump has indicated he's optimistic with respect to a potential trade deal with China, but there was still a sizable distance to go in the trade talks.

A meeting between the President Trump and Chinese President Xi Jinping is now highly unlikely to take place by the key March 1 deadline.

Financial markets didn’t like what they heard and went down rather substantially.

The big unanswered question remains if the U.S. will raise tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent as of the (still) March 1st deadline.

All that said, it appears, once again, that the cost of putting tariffs on trade, which is in fact taxing trade, is not fully understood by many.

Nearly all global trade is conducted by large companies. Taxing trade either means that large companies pay the tax, customers of large companies pay the tax, or large companies increase their costs by finding ways of avoiding paying the tax. It doesn’t really matter which scenario is followed, the conclusion is still the same.

A tax on trade is a tax on equities. President Trump may conclude that taxing equities is a price worth paying for whatever political objective the U.S. has in its dispute with China.

At the same time, no one should be in any doubt that when the risks of continuing the U.S. equity tax go up, equities are likely to go down, hence the volatility in financial markets evident yesterday.

Financial markets are still clearly betting on a trade agreement between the U.S. and China being reached, at least at some level, which is something that would prevent further tariffs or taxes being imposed.

Equities have rallied quite strongly since Christmas of course. However, the uncertainty and political noise is a reminder that whatever the economic fundamentals are, casual political statements do have the power to influence financial markets quite strongly.

Euro Area Trade Data

The German trade surplus decreased to EUR 13.9 billion in December from EUR 18.4 billion in the same month a year earlier. It was the smallest trade surplus since January 2016, mainly due to a sharp decline in German exports.

It’s a fact that that Germany’s trade balance is political sensitive inside and outside Europe.

Considering the whole year of 2018, the trade surplus declined 8.1 percent to EUR 227.8 billion (USD $258 billion) from EUR 247.9 billion (USD $281 billion) in the corresponding period in 2017, large enough for other Eurozone members to look towards Germany for a new ECB fiscal stimulus should economic growth remain sluggish.

This is of course important for investors because new ECB stimuli would mean less upside potential for the euro.

All this comes at a moment that the European Commission just revised down its growth forecast for Germany to 1.1 percent in 2019, down from the previous forecast of 1.8 percent growth while the average growth while the European Commission lowered also its growth forecast for the Euro area as a whole to 1.3 percent in 2019, down from the previous estimate of 1.9 percent.

Brexit Saga Continuous

Meanwhile, the interminably tedious EU-UK divorce sees today UK Prime Minister May visiting the Republic of Ireland, which is a country that is likely to suffer the most in the event of a ‘Hard-Brexit’. No, it is not the UK that comes first. The UK comes in second.

The Irish Prime Minister Leo Varadkar has already signaled the need for a ‘bailout’ in the event of a ‘hard’ exit by the UK, the Irish Examiner reported.

At the same, the thing that is most likely to lead to a ‘hard’ exit by the UK is the disagreement over the border between Northern-Ireland and the Republic of Ireland.

I would say, it’s better to expect nothing from today’s discussions in Dublin, except indications of a further delay in the exit process.

There are reports of a UK government group planning the UK’s response to a ‘hard’ exit. Tax cuts and trade tax cuts, both being mentioned.

Meanwhile the opposition Labor Party’s leader Mr. Corbyn has been forced to take a position on the whole situation, and in doing so has underscored that the Labor Party is just as divided as the governing Conservative Party.

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

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A tax on trade is a tax on equities. President Trump may conclude that taxing equities is a price worth paying for whatever political objective the U.S. has in its dispute with China.
trump, tax, trade, equities
Friday, 08 February 2019 09:41 AM
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