Only Time Will Tell if Trade Tariffs ‘MAGA’
For better or worse, President Trump has taken another step to “Make America Great Again.” Trump has given the green light to U.S. Trade Representative Robert Lighthizer to levy tariffs on at least $50 billion in Chinese imports. A specific list of who and what will be targeted will be unveiled in the upcoming days. As a result, Chinese President Xi Jinping announced plans for reciprocal tariffs on $3 billion of imports from the U.S., including products from steel to pork.
Oh, and by the way, did I mention that the markets have an interest in what’s going on here as well? The VIX, a measure of market volatility, rose sharply in trading on March 22 as the Dow Jones Industrial Average plunged more than 700 points, a drop of roughly 3%. If the markets can tell us anything, they are speaking up about what they fear most; uncertainty.
From a macroeconomic perspective, economists and number crunchers on Wall Street are figuring out how such events will play out in GDP, inflation, employment et al. After all, the raison d’etre of the tariffs is to create growth and put America back on a level playing field with the rest of the world. Some call this protectionism and will tell you that history will dictate that tariffs in and among themselves have not bettered our domestic economy. Others like President Trump argue that economies like China manipulate the markets through devaluing their currency making their goods and services more desirable to the world.
From a microeconomic perspective, this will have consequences for certain domestic industries, as well as unforeseen consequences down the road. There is no exact science in determining how such things will turn out. However, we can drill down into the details somewhat, and take a look at a list of companies with the most exposure to China, as reported by UBS.
As one might expect, technology could be at the top of the list. Cell phones, semiconductors, and computers may all be affected. Not only are many of these companies using China to manufacture goods and supply valuable raw materials, but as reflected in the UBS data, they consume a growing portion of revenues of these U.S. based public companies. The Chinese middle class has decided they like to use cell phones and computers, and probably will not go back to the abacus.
Independent of tariffs, China has assumed massive amounts of debt that may have a deleterious effect on their economy. It is estimated that China’s debt-to-GDP ratio stands at over 250 percent of GDP, a figure that is setting off alarm bells that the Chinese economy may fall into financial crisis if such issues are not addressed appropriately.
One must remember that at the end of the day, the United States and China are two very different geopolitical entities. As China initiates a modicum of free trade for its middle class, it still has an oppressive world view that dominates its society. As with Russia, elections are held for media purposes only, knowing the outcomes of such events far ahead of election time. By no means perfect, our founding framers of the constitution have allowed us to grow capitalism to the point where it has taken us to become the greatest economy in the history of civilization. A lot of people don’t like to hear that, whether they speak Chinese or English.