Over the past several weeks, we have woken up to a real trade war as China and the U.S. slapped each other with new, and significant, tariffs. The general thought is that this trade war could last into next year, but with a strong U.S. economy, it may take some time for the general public to feel pain from this.
To be clear, tariffs are taxes on imports and/or exports that ultimately end up hurting the consumer. As with any type of tax, tariffs are a hurdle to business activity and thereby reduce free trade, reduce consumer choice and increase prices. The resulting slower business activity due to a tariff does what any tax does; ultimately flows down to the consumer in higher prices. Thus we are anti-tariffs. Additionally, because tariffs are imposed by governments thereby adding a political element where no politician or country wants to be seen as week or as giving in, a tariff war can quickly get out of control. And once tariffs are imposed they tend to be hard to remove. Below are some points to keep in mind:
1. Free trade depends on fair trade; while we are anti-tariffs, China has kept a significantly higher tariff level in addition to well-known non-tariff activities that have given them competitive advantages, whether those activities are stolen intellectual property, focusing on exports or maintaining high tariffs
2. Years ago, especially during the Clinton administration, China was a smaller economy just getting involved in international trading at a larger scale and the U.S. pushed for their inclusion into the WTO (World Trading Organization). In order to bring China into the fold, nations tolerated some of the advantages, like high tariffs, that China imposed. Given how much China has grown and how big their economy is now, that unfair advantage should be removed if China wants to continue as a fair trading partner
3. Impact to U.S. business appears to be mainly farmers (soybeans), airplanes and cars. One estimate to the impact of tariffs is a .7% decline in GDP, assuming no change in consumer behavior. That is large, although maybe not large enough to cause a recession as the economy stays strong
BOTTOM LINE: We don’t like tariffs and if we had our way, tariffs wouldn’t exist. However we recognize that free trade requires fair trade, and the U.S. can’t pay an unfair amount forever. China isn’t the only one with significant trade imbalances – Europe is also in the mix as they have a similar tariff advantage against the U.S. At some point mom and dad have to stop giving allowance to junior who is now working, and in some instances, making more than mom and dad. We don’t think a tariff war is the answer to fair trade, but we do think there is some room to ultimately reduce tariffs here, which all parties should be interested in.
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.