Tags: us | china | tariffs | proposal | isolationism

United States' Proposed 10-Percent Tariffs a Move Toward 'Hermit Kingdom Status'?

United States' Proposed 10-Percent Tariffs a Move Toward 'Hermit Kingdom Status'?
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Wednesday, 11 July 2018 08:29 AM Current | Bio | Archive

New list of 10-percent tariffs

The Trump administration released on Tuesday an extra list of 10-percent tariffs on $200 billion in Chinese goods.

“The $200 billion figure we're looking at is roughly equal to their exports to us,” a senior administration official said. The tariffs will not go into effect immediately but will undergo a two-month review process, with hearings on August 20-23.

Some of the products on the list facing tariffs are from Made in China 2025 sectors, the official said. Made in China 2025 is a strategic plan to make China a leader in key global industries, including technology.

For investors perhaps, it would not be such a bad idea to get some of the facts from the swirling confusion.

Publishing a list is not the same as raising tariffs. It may be part of the deal negotiation, if such muddled confusion can be called “art.” Perhaps it’s scribble of the deal negotiation.

Now, the economic impact of these tariffs is less than double of the impact of the tariffs on $50 billion of goods because the rate here is 10 percent, and not 25 percent. Simplistically, if they worked, which they won’t, the old tariffs would raise $12.5 billion from U.S. consumers, and the new tariffs would raise $20 billion from U.S. consumers.

Of course, the old tariffs were probably easier to evade.

The tariffs will not take effect 'til late this year, if they do take effect — not before September, and perhaps, given practical issues, not before November.

Equity markets will react more than economies.

This is less about the reality of the U.S. taxation and more about what this says about the rising risk of U.S. isolationism.

It’s also not about U.S. companies, but about companies with U.S. production. Any company with operations in the United States, which cannot be easily moved out of the United States, faces the risk of having part of their production cut off from the global trading system.

Investors should not forget that this is not the 1930s; the rest of the world is happily trading with one another.

This is a bilateral issue with the U.S. moving towards “hermit kingdom status” in the global trading system.

In the second quarter, real global trade was stable or rising as a share of the world economy, so, not a trade war.

If these tariffs are actually imposed, and assuming an equivalent response from China, the risk of a U.S. trade war with the rest of the world obviously rises. 

Dealing with the implications of U.S. isolationism is likely to be the main focus for markets today.

Emerging Markets — Turkey

Turkish President Recep Tayyip Erdogan said on Monday that his son-in-law, Berat Albayrak, will run a new combined ministry of treasury and finance. This crushes any hopes that sense and responsibility will reign in fiscal matters. Erdogan has also given himself the power to name the central bank governor, and thus the ability to entrench his unorthodox view that higher interest rates cause faster inflation.

Yesterday’s painful market reaction is probably only the start. The Turkish lira weakened versus the dollar, 10-year yields soared to more than 17 percent, credit default swaps widened, and stocks fell, with a 3.7-percent drop in the banking industry leading the declines.

It is hard to see the credit rating companies not taking a dim view of the new political realities and cutting Turkey’s ratings deeper into junk.

For investors, the best course is almost certainly to stay away. There is nothing to pin down the value of the Turkish lira, nor is it a prime target to short. It would cost an incredibly steep 17.75 percent, at least, to borrow lira in order to buy it back later at a cheaper price.

There’s very little liquidity and a new normal of 5 lira per dollar against 4.75 today looks to be on its way. That kind of fundamental shift in a thin market certainly smells like a crisis, especially given that now it seems only an official intervention can calm investors’ fears.

The Producer Price Index (PPI)

Today, the Bureau for Labor Statistics will release the Producer Price index (PPI) for June. The U.S. producer price inflation is more interesting as an indication of pricing power by U.S. companies, which is not an entirely irrelevant issue when considering whether tax increases (tariffs) may be passed on or absorbed in profit margins.

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

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This is less about the reality of the U.S. taxation and more about what this says about the rising risk of U.S. isolationism.
us, china, tariffs, proposal, isolationism
Wednesday, 11 July 2018 08:29 AM
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