It is without a doubt that the two bombshell tweets from President Donald Trump on Sunday indicated that the trade talks on tariffs and intellectual property issues had gone way south. News reports on Wednesday indicated that China’s representatives are coming to America to avoid a last-minute turn and to strike a deal in the final hours. What has happened that does not require interpretation is that the Office of the United States Trade Representative (USTR) already has filed its paperwork to formally raise tariffs to 25% from 10% on roughly $200 billion worth of goods coming from China per year.
While these numbers sound massive, it’s important to consider that the U.S. gross domestic product is now running close to $21 trillion on an annualized basis. The U.S. official unemployment rate is also at a 50-year low of 3.6%. If tariffs are going to go from 10% to 25% on $200 billion worth of goods, this might only represent an additional cost to the U.S. economy of about $30 billion (at a new $50 billion, versus a prior $20 billion) using straight-line math. If things were only so simple as straight-line math.
China already has warned that it will take necessary countermeasures if the United States raises its tariffs on Friday. That also sounds grave on the surface because of trade war implications. And what if the United States doesn’t stop at 25% tariffs ahead, in retaliation on our end for retaliation by China?
Some members of the financial media have had plenty of practice scaring the public into thinking that every cost increase might represent the end of the 10-year bull market or that a major stock market correction could be starting. Even worse, the media loves to warn that the next recession may be imminent.
24/7 Wall St. wanted to look at what the tariffs really mean to the broader economy and what the real impact might be. The USTR has formal trade figures from 2018 (or most recent annual data) concerning U.S. and Chinese trade facts. Again, the $200 billion is not the tariff amount. It is the 25% tariff versus an existing 10% tariff, and it’s not even unilateral on all goods.
The long and short of the matter is that the math just doesn’t really seem to add up to a recession. Whether the stock market wants to have a correction, big or small, it may simply be mechanical rather than a major change for the long haul. The goals behind seeking this trade deal have not really been about the short-term performance of the stock market, and the president has indicated in the past that there can be some acceptable giveback, considering how much the market has risen over the past two years. Investors who have been around for decades also understand that big corrections occur from time to time in the middle of great bull markets, often for reasons that may sound bleak in the middle of any given day but are forgotten within a week or month.
There absolutely will be some impact felt at certain companies in affected industries, and there undoubtedly will be some pressure in certain regions and industries. It also would seem to be inevitable that there could be isolated events of layoffs, furloughs, hiring freezes and financial losses in many street-level instances.
The USTR data showed that the United States’ combined goods and services trade with China totaled an estimated $737.1 billion in 2018. Of that, there were $179.3 billion in exports and $557.9 billion in imports. The total goods and services trade deficit with China was $378.6 billion in 2018.