We live in a global economy where domestic companies are becoming more exposed to international policies and trade agreements. U.S.-based companies now receive more than 1/3 of their revenue internationally. As a San Diego financial advisor, our job is to analyze these policies and tariffs’ impact on our clients.
To better understand what is at stake regarding the potential trade war between the United States and China, I decided to run a few numbers. I am by no means an expert on trade agreements, nor am I a global economist. Nonetheless, I have an extensive background in finance, and perhaps that is enough to make an informed decision. After a bit of research, it is clear a trade war between the U.S. and China will negatively impact both countries (a no-brainer conclusion). But I’ve also determined that China has much more to lose than the U.S.
Current State of the Trade War
This, of course, is an ever-changing scenario with tariffs threatened and imposed. President Trump has initiated the trade war as his administration has stated that the $570B U.S. trade deficit is due to unfair trade agreements. However, the U.S. is largely a consumer-driven economy, and cheaper imports have undoubtedly helped the consumer.
Here is a current look at the threatened and imposed tariffs from a global perspective as of 9/9/18 (Source: Marketwatch):
Enforcer (Country) | Recipient (Country) | Product/Goods | Tariff Rate | Imposed or threatened |
U.S. | China, South Korea and Mexico | Washing machines | 20%-50% | Imposed |
U.S. | Most countries, notably China | Solar panels | 30% | Imposed |
U.S. | Canada | Newsprint | 22% | Imposed |
U.S. | European Union, Canada, Mexico and most other countries | Steel | 25% | Imposed |
U.S. | European Union, Canada, Mexico and most other countries | Aluminum | 10% | Imposed |
U.S. | Turkey | Steel | 50% | Imposed |
Turkey | U.S. | Cars, alcoholic drinks, tobacco, coal, makeup and rice | Doubled to as high as 140% | Imposed |
European Union | U.S. | Bourbon, orange juice, jeans and other products | 25% | Imposed |
Mexico | U.S. | $3 billion of U.S. goods including steel and pork | 20%-25% | Imposed |
Canada | U.S. | $12.8 billion of U.S. goods including maple syrup and whiskey | 10-25% | Imposed |
European Union | Most countries, except for “some developing countries.” | Import tariff quotas on a number of steel products | 25%, once imports exceed the average over the last three years | Imposed |
India | U.S. | $241 million of apples, stainless steel and other products. | 7.5%-60% | To take effect Sept. 18 |
U.S. | China | $50 billion of goods | 25% | Imposed |
China | U.S. | $50 billion of U.S. goods | 25% | Imposed |
U.S. | China | Additional $200 billion of goods | 25% | Threatened |
China | U.S. | Additional $60 billion of products | 5%-25% | Threatened |
U.S. | China | Another $267 billion on top of the $200 billion | Threatened | |
U.S. | European Union | Automobiles | 20% | Threatened |
U.S. | Uranium | Threatened |
Source: Bull Oak Capital
What is in question here is the Net Exports aspect of our GDP. In terms of exports, China is our third-largest largest trading partner, representing 8.4% ($130B) of the total.
Top U.S. Export Trade Partners (2017)
Country | Value of Goods ($MM) | % of Total |
Canada | 282,392 | 18.3% |
Mexico | 242,989 | 15.7% |
China | 130,370 | 8.4% |
Japan | 37,696 | 2.4% |
United Kingdom | 56,329 | 3.6% |
This is not the first time that President Trump has threatened to tax imports from a trade partner. If you recall, last year there was talk that we may tax imports on Mexican goods. It is apparent that if the U.S. implements tariffs on incoming Chinese goods, the volume of those goods entering the country will drop (simple economics here: higher prices equate to lower demand). Consequently, if the value of imported Chinese goods drops, then our trade deficit increases, negatively impacting U.S. GDP.
Furthermore, the question then becomes, who will fill that demand gap? Will it be U.S. manufacturers? Mexican or Canadian companies? Who knows. However, it is safe to assume that those goods’ prices will be higher than their Chinese counterparts. If this is the case, higher prices mean higher levels of inflation. And inflation, of course, is bad for consumers and the overall economy, especially for a country like the U.S., where consumption makes up the bulk of our economy.
Higher Prices > Higher Inflation > Higher Interest Rates > Lower Consumption > Slower Economy