FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 6, 2019

IN THIS ISSUE:

1. President Trump Orders New Tariffs on Imports From China

2. US Consumers Are Going to Feel the Latest Round of Tariffs

3. Trade Tariffs Are Bad, So Why Does President Trump Do It?

4. Trump’s Surprise New Tariffs Added to Big Selloff in Stocks

President Trump Orders New Tariffs on Imports From China

President Trump announced last Thursday that he will add a new 10% tariff on $300 billion of Chinese-made products starting on September 1, which would put a tax on virtually all Chinese goods coming into the United States.

Earlier this year, Trump slapped a 25% tariff on $250 billion of goods we import from China – in addition to existing duties on imported appliances, steel and aluminum.

The latest announcement came as a surprise because Mr. Trump and Chinese President Xi Jinping agreed to put additional tariffs on indefinite hold at the G-20 Summit in Osaka, Japan in late June. On Thursday, President Trump tweeted:

"Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 billion dollars of products coming from China into our country."

Later in the day, Trump said in remarks to reporters at the White House that he might ratchet the new tariffs up to 25%, as he's previously threatened – or even higher. He warned:

"It can be lifted in stages so we're starting at 10% and it can be lifted up to well beyond 25%. But we're not looking to do that, necessarily."

The president’s announcement on Thursday also came as a surprise because the trade talks with China were reportedly still ongoing, but apparently not to Mr. Trump’s liking. China has threatened to retaliate with new tariffs of its own, but because China buys less from the US than we buy from them, Beijing cannot fully offset Trump’s latest round of duties.

So, China did what it had to do to respond: Over the weekend, they devalued the yuan to the lowest level since the financial crisis of 2008. Stocks around the world plummeted on Monday. The People’s Bank of China let the yuan weaken below the sensitive seven-to-one-dollar level for the first time in more than a decade. It remains to be seen how far China will go, but this has the makings of an all-out currency war!

Analysts have also suggested that China could consider curbing exports of so-called “rare-earth minerals” to the United States, reinstate a tariff on American cars and continue to shun agricultural goods from American farmers. China’s leaders feel President Trump broke his word, and they appear ready to abandon a trade deal with the US altogether.

US Consumers Are Going to Feel the Latest Round of Tariffs

The earlier round of 25% tariffs on $250 billion in Chinese goods were targeted mostly on industrial goods, and China had devalued its currency even before the big move this weekend – so US consumers have not seen significant increases in prices as of yet.

However, the 10% levy announced Thursday is directed squarely at consumer items like clothes, toys, footwear and many other popular goods. If President Trump ratchets the tariffs even higher, as he threatened to do, it will hurt American consumers even more.

With many consumer products, the supply comes almost entirely from China. Take shoes, for example: Less than 1% of shoes are made domestically, and China is the source of 70% of the footwear goods imported into the United States. As we all know, quality shoes are already expensive – imagine if they go up 25% in the months to come.

The most prominent American company bracing for the tariffs is Apple, which typically unveils new products every September. In a letter in June, Apple urged Robert Lighthizer, Mr. Trump’s top Trade Adviser, not to proceed with any new tariffs.

The company warned that such tariffs would hamper its global competitiveness and reduce its contribution to the United States economy. Apple also said that new tariffs would tilt the playing field in favor of its global rivals.

Thus far, Mr. Trump has shown little sympathy for Apple. Last month, after the company filed 15 tariff exclusion requests, he said the requests would be denied, and that the company should make its products in the United States.

Should the new tariffs take effect on September 1, they will hit Apple’s phones, watches, MacBooks, iMacs, iPads, AppleTV, keyboards and batteries. The company’s shares fell more than 2% on Thursday after Mr. Trump said the new tariffs were coming and were down again on Friday. Apple plunged over 5% on Monday alone! And Apple is just one example.

Trade Tariffs Are Bad, So Why Does President Trump Do It?

As regular readers know, I am no fan of trade tariffs. They are bad for consumers, especially this next round to go into effect September 1, and bad for the economy. So why does the president do it? Initially, he claimed the Chinese companies that sell to America would pay the tariffs, which I debunked in these pages at the time. I knew he had to know better.

On Saturday, Mr. Trump was defending his latest decision to tax virtually everything China sells us, and noted the fact that the latest trade negotiations in Beijing ended last week with no deal. In those remarks, he made a comment that proves he understands that tariffs can hurt consumers and the economy. Here’s what he said:

“Things are going along very well with China. They are paying us tens of billions of dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going. So far, our consumer is paying nothing [extra] - and no inflation.”

This proves the president knows that tariffs can result in higher prices on consumer goods. And he also knows that China cannot continue to devalue its currency indefinitely to offset the additional tariffs coming on September 1 and beyond.

Despite the economic and political uncertainty surrounding the tariffs, Trump also claimed – without providing any evidence – that his trade policy is paying dividends and forcing other countries to initiate talks to create new trade deals. He tweeted:

“Countries are coming to us wanting to negotiate REAL trade deals, not the one-sided horror show deals made by past administrations. They don’t want to be targeted for Tariffs by the U.S.” Of course, he didn’t name any other countries that are asking for new trade deals.

I have another theory as to why Mr. Trump announced another round of tariffs on Chinese goods – the day after the Fed lowered interest rates. The president made it known last week that he was not happy with the Fed for lowering its key interest rate by only 0.25%. He was obviously in the crowd that wanted a 50 basis point cut in the Fed Funds rate.

Fed Chairman Jerome Powell (who Trump appointed) said in his press conference last Wednesday that a big reason the policy committee decided to cut rates was concerns over rising trade tensions. Some speculated that President Trump reacted by thinking:

OK, if the first round of tariffs on China was only worth a 0.25% rate cut, here’s another big round of tariffs. So, go ahead and give me the other 0.25% I wanted in the first place.

I don’t know if this was what the president was thinking, but it would not surprise me one bit. And I’m not the only one who believes this – see article in the links below.

Trump’s Surprise New Tariffs Added to Big Selloff in Stocks

US stock markets fell sharply lower Wednesday afternoon when Fed Chairman Powell said in his press conference that he didn’t foresee a “series of rate cuts” to follow the initial cut of 0.25%. That was not what the markets wanted to hear.

President Trump’s surprise announcement of a second larger round of tariffs on Thursday pushed equity markets even lower. Stocks around the world moved sharply lower in the wake of the two new announcements. Several market indexes in the US and Europe fell as much as 2-3% late last week. They then plunged another 3+% on Monday after China devalued the yuan.

The bottom line is: The US-China trade dispute has had a chilling effect on the world economy as global trade volumes plummet and major companies pause investments. Economic growth has eased around the world, and several major countries are flirting with recession.

And the latest round of tariffs has not even started yet.

And one final point: There is no guarantee that President Trump will make good on his latest threat to implement a second round of tariffs on China. Some believe he is using this threat as a bargaining chip to get China to agree to something he can live with. Thus, he could still back off.

While that’s certainly a possibility, I wouldn’t bet on it. China does not want to cave to Trump’s demands. It will be very interesting to see how this plays out! I will keep you posted, as always.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Markets Fall Sharply Amid Fears of Full-Scale US-China Currency War

Spiraling Trade Tensions With China Threaten US Economy

Trump’s New Tariffs Take Aim at China & the Fed

Gary's Between the Lines Blog: Economy Slowed to 2.1% in 2Q, But Likely to Rebound

 

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