FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 12, 2019

IN THIS ISSUE:

1. US Trade Deficit Hit Record $891 Billion in 2018

2. Trump’s Trade Tariffs Are a Tax on US Consumers

3. US-China Trade Negotiations Hit a Bump Last Week

4. Another Reason to Consider Our Alpha Advantage Strategy

Overview

The US trade deficit soared to a new record high in 2018 according to the latest Commerce Department report out last week. President Trump has promised that his trade tariffs on China and other trading partners would reduce the trade deficit. They have only made it worse.

Today, I’ll offer more evidence that trade tariffs are not paid by our trading partners, but instead result in higher prices for US consumers. This is not good for the US economy and the stock markets. Stocks have turned decidedly lower in recent days as talks of a new trade deal with China deteriorated.

US Trade Deficit Hit Record $891 Billion in 2018

The trade deficit/surplus is the difference between how much we import versus how much we export. The US, as the largest economy in the world, has imported more than we export for years. That’s absolutely normal for the richest nation on the planet, but the mainstream media always paints trade deficits as a bad thing. Here are the latest numbers.

The Commerce Department reported last week that the US trade deficit in goods swelled to a new all-time high of $891.3 billion in 2018, defying President Trump’s efforts to narrow the gap. Imports jumped due to the strong economy, and some exports – including soybeans and other farm products – got hammered by retaliation against US trade policies.

The trade picture looked somewhat less dire when services – including tourism, higher education, banking and others – are counted, though this deficit still deteriorated markedly. With services included, the overall trade gap grew 12% last year to $621 billion, the widest since 2008. US trade deficits with China and Mexico, already the nation’s largest, also reached new records last year.

Total US goods exports to China fell 7% last year to $120.3 billion, but American imports of Chinese merchandise rose by that same percentage, to $539.5 billion.

Separate data from China’s customs administration provide part of the explanation. Chinese purchases of US soybeans  – one of America’s top exports, which were targeted by China’s retaliatory tariffs – fell by nearly half last year to $7.1 billion from $13.9 billion in 2017. The US loss was Brazil’s gain, as that country’s soybean exports jumped by $8 billion.

There were also notable declines in US shipments to China of frozen fish, American-made cars, and other products hit by higher tariffs. In Trump’s first two years in office, the overall deficit in traded goods and services has surged by nearly 25%.

The increase was driven by some factors outside Mr. Trump’s control, like the global economic slowdown and the stronger US dollar, both of which weakened overseas demand for American goods. Also, the strong US economy meant Americans had more money to spend on imports.

The president’s trade war with Beijing also widened the gap. Stiff tariffs on Chinese goods helped slow China’s economy, further crimping American exports, which declined nearly 50% in December from the same month a year before.

While President Trump sees the trade deficit as a sort of economic scorecard for which country is on top, most economists disagree with this perspective. Most view trade deficits not as a sign of economic strength or weakness, but as a function of macroeconomic factors like investment flows, fluctuations in the value of currency and relative growth rates. I agree.

Trump’s Trade Tariffs Are a Tax on US Consumers

President Trump implemented various trade tariffs throughout 2018. In January, he imposed tariffs on imports of solar panels and washing machines. Soon thereafter, he imposed tariffs on steel and aluminum, although some major trading partners were exempted from these trade sanctions.

In July, Trump ordered additional targeted tariffs on more than 800 categories of imports from China, which were estimated to cost China at least $200 billion in lost revenues. Those tariffs on China were expected to more than double in 2019, but President Trump has delayed them temporarily as the trade talks are still proceeding. This is a serious trade war if it continues.

The threat of an increasing trade war with China was one of the main factors that spooked stock prices significantly lower in December, and again this month. It remains to be seen what will come out of the current trade talks with China. If there is no deal, I would expect more pressure on stocks.

As I most recently warned on November 29 and often in the past, trade wars with foreign countries only result in higher prices paid by Americans on the goods we buy which come from other countries and on products we make here that contain imported parts subject to the tariffs.

Take China, for example. In January of last year Trump levied a 25% tariff on Chinese washing machines. In effect, that meant that companies like Samsung and LG had to raise their washer prices significantly. Now you might think US consumers would simply buy other washing machines that are not subject to the tax. There are certainly other brands out there.

But here’s the dirty little secret. When Samsung, LG and the like raise their prices significantly, that gives domestic manufacturers the opportunity to raise their prices as well, just not as much as Chinese brands.  Tariffs are a double-whammy on consumers as we can see below.

That’s an increase of 11.54% in the last year (and this chart only goes through December). They have continued to rise since then. I know first-hand because I had to buy a new washer/dryer recently, and prices are much higher now than the last ones I bought some years ago.

Major appliances are but one example. Prices for goods subject to the tariffs are going up across-the-board based on what I read. President Trump may say, and believe, that “billions of dollars will soon be pouring into our Treasury from taxes that China is paying for us,” but China isn’t paying the taxes. US consumers are!

The president has also said repeatedly that the tariffs will “cure our trade deficit.” That’s clearly wrong! As we just read above, the trade deficit on goods was the largest ever in 2018.

In a new study, “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” economists Mary Amiti of the Fed, Stephen Redding of Princeton and David Weinstein of Columbia document what economists have told us for decades: that tariffs are a tax on the consumer.

The study found that the waves of tariffs throughout 2018 resulted in “substantial increases” in the prices of intermediate and final goods, the cost of which was born entirely by US consumers. And the authors of the study confirmed that the higher price of imports enabled US producers to raise their prices, as I discussed above.

The scary part is that President Trump apparently doesn’t believe this. He’s surrounded himself with some very smart people, although most of them have protectionist leanings, but they can’t seem to convince Trump that tariffs don’t reduce the trade deficit and definitely hurt US consumers. Larry Kudlow, Director of Trump’s National Economic Council, certainly knows this. I’ve heard and seen him say so on numerous occasions. Yet it remains to be seen if the president will change his position.

US-China Trade Negotiations Hit a Bump Last Week

We’ve been repeatedly told this year that the ongoing talks between US and China trade representatives were going well, and that a new accord was expected relatively soon, perhaps as early as the end of this month. President Trump has even invited China’s President Xi Jinping to a summit at his Mar-a-Lago estate in Florida, presumably to hammer out any final details and hopefully sign the new trade deal.

The prospect of a new trade deal with China bolstered the stock markets earlier this year.

But Chinese leaders were taken aback by President Trump’s latest failed meeting in Vietnam with North Korean leader Kim Jong Un. Mr. Trump’s decision to break off those talks and walk away sparked serious concerns with China’s President Xi Jinping, who has backed-off the Mar-a-Lago summit, at least until more progress is made.

Keep in mind that President Trump had promised to more than double the trade tariffs on China to 50% if a trade deal was not reached by March 1, but delayed the increase because the trade talks were supposedly going so well. Now we don’t know what he will do.

The stock markets reacted accordingly. The Dow Jones Index was down 8 of the last 9 trading days, as of the end of last week.

Another Reason to Consider Our Alpha Advantage Strategy

This chart looks quite bearish. The rally stopped well short of the record high above 26,000 late last year, and below the two more recent rallies in November and December. Let’s hope there is promising news of a trade deal with China very soon, or the 10-year bull market in stocks could be in real danger of coming to an end – especially if Trump doubles the tariffs on China.

This argues once again for having some strategies in your portfolio that can go to cash, or even “short” stocks if we get into a bear market. I continue to emphasize that you consider our Alpha Advantage Strategy, which can be long, short or in cash, and has an outstanding track record, as you can see at the link above. (As always, past performance is no guarantee of future results.)

Alpha Advantage WEBINAR: On March 21 at 1:00 Eastern, we will host a live webinar with Paul Montgomery, the Trading Manager for the Alpha Advantage Strategy. Paul will explain how the multi-manager strategy works and will answer any questions you have. Be sure to register here.

Best regards,

Gary D. Halbert

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