Tags: chinese | currency | tariffs | yuan

Trade Tariffs Are Really 'Taxes' on Low-Income American Consumers

Trade Tariffs Are Really 'Taxes' on Low-Income American Consumers
(James Steidl/Dreamstime)

Tuesday, 03 July 2018 08:34 AM Current | Bio | Archive

The People’s Bank of China (PBoC) Governor Yi Gang stated that the central bank will keep the yuan (CNY) exchange rate basically stable at reasonable and balanced level.

This is the first clear statement on the currency by the central bank since the yuan started weakening in mid-June.

The yuan strengthened immediately after the comments were reported, having earlier weakened beyond 6.7 to the dollar.

Starting Friday, the United States will impose a 25 percent tariff on $50 billion of Chinese exports when U.S. customs agents will begin collecting the duties.

The global trade dispute has now placed new taxes on imports of around 0.3 percent of global trade, which amounts to less than 0.1 percent of the world economy in real terms.

With the threat to tax of up to $50 billion of Chinese imports and with China retaliating, that could rise to just under 0.4 percent of the world economy under new taxes.

Maybe it’s good to recall that the burden of taxation/tariffs rarely falls evenly.

Broad trade taxes/tariffs would fall hardest on low-income American consumers. There are also reports that the current trade taxes and proposed taxes on goods partially made in China are hitting U.S. younger consumers as well.

In some of the finished products being taxed under the generic other machinery category there are products that are predominantly purchased by millennials.

President Donald Trump wanted apparently to impose a consumer tax on imports that did not hurt U.S. consumers by specifically targeting products for which there are regularly available substitutes for Chinese made products.

In many ways, the impact of tariffs on exporters can be viewed similarly to a currency appreciation. Putting tariffs on Chinese goods sold in the United States or appreciating the renminbi could both raise the price of Chinese exports in the U.S. in dollar terms.

The reality of modern trade is that both moves would tend to eat into exporters profit margins rather than to raise prices.

However, on the surface a tax on Chinese imports into the United States and a renminbi depreciation could offset the profit margin impact.

Life is not that simple. Chinese exports use a lot of imports to make the exports. A tariff just hurts exporters profit margins that a weaker renminbi may hurt importers profit margins, especially if the imports are raw materials.

German Chancellor Angela Merkel

The European Union’s bailout of Germany seems to have worked or be it in a rather shaky fashion. German Chancellor Merkel has agreed a deal with the junior coalition partner, the Bavarian Christian Social Union (CSU) over refugee migration.

There is the small matter of  Germany's Social Democratic party (SPD) also agreeing to the deal as the middle partner in the coalition government but for the time being, the threat of a German government collapse seems to have fallen.

The Bavarian elections in October and the need for tough talk in advance of those elections may still give markets and the media something to worry about over the summer months.

The euro rallied a little bit on the news, but this is not a cause for significant shifts in markets.

ECB talk

Today, Peter Praet, Member of the Executive Board of the ECB is scheduled to speek. The compromise of the ECB “hawks” and the ECB “doves” has left ECB watchers with relatively little to do. The ECB having preannounced policy as far as the eye can see. The potential for surprises delivered in speeches is relatively limited.

The only things which do have the potential to get financial markets interested are “technical” details about, for example, how bond holdings will be re-invested and other fun facts. This is not the sort of thing to be announced casually in a speech.

Emerging Markets

Carlos Urzua, Mexico’s new Finance Minister in the coming government, said the new administration will strictly respect the autonomy of the country’s central bank and that the floating exchange rate regime will continue, as it has proven to work over the years.

On Monday he stated: “We’ll have an extremely responsible macro, fiscal and debt policy management. We strongly believe that the tax, financial regulatory agencies need to be managed in a transparent matter and with a clear risk-based management policy."

Lopez Obrador was elected as Mexico’s first left-wing president in recent times, and his party’s coalition also looks poised to pick up scores of seats in Congress, with some polls indicating that it may actually take a majority in both legislative chambers. That created jitters among investors who worry about what policies the new administration will enact.

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

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Broad trade taxes/tariffs would fall hardest on low-income American consumers. There are also reports that the current trade taxes and proposed taxes on goods partially made in China are hitting U.S. younger consumers as well.
chinese, currency, tariffs, yuan
Tuesday, 03 July 2018 08:34 AM
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