Implications of Trade Turmoil

In the past few months, news headlines have been focused on the possibility of the United States facing a trade war on many fronts: China, the European Union (EU), Canada, and Mexico.

Talks of a trade war began back in March, when President Donald Trump announced a 25% import tariff on steel and 10% on aluminum. This policy impacted many major trading partners. China, the EU, Canada, and Mexico have all expressed intent to impose retaliatory tariffs on the U.S. The Dow Jones Industrial Average fell over 200-points in one day in response to this news. Other major indices around the globe posted similar downturns that day. Indices around the globe remain very volatile.

On Friday, July 6th, tariffs on $34 billion in Chinese goods went into effect. These tariffs focus on Chinese machinery, auto parts, and medical devices. Technology, industrials, and materials are the sectors expected to be the most negatively impacted by the decision. China responded immediately by implementing tariffs on $34 billion in U.S. goods, ranging from soybeans to pork. Given this, President Trump has since proposed the possibility of additional tariffs on $200 billion in Chinese goods in the future that would focus on consumer goods.

The United States and China have the two largest economies in the world and are close trading partners. 20% of Chinese exports went to the United States in 2017, equaling about $506 billion in goods. China imported $130 billion worth of U.S. goods, as reported by the United States Census Bureau. Overtime back-and-forth tariff hikes could hurt both economies.

The implications of these tariffs are widely controversial and debated. The decision by the U.S. to raise tariffs on foreign imports could result in the following, as written in the recent Gleanings, by Raymond James’ Chief Economist, Scott Brown:

  1. do little to “save” U.S. jobs
  2. raise input costs
  3. are an indirect tax on U.S. consumers and businesses
  4. invite retaliatory tariffs against U.S. exports
  5. could lead to a broader trade war
  6. disrupt supply chains
  7. create greater uncertainty for global investment

Overall, U.S. economic activity and growth continue to be strong. And with European car manufacturers encouraging the EU to eliminate all tariffs on car imports and, reciprocally, exports, there is at least some indication that new trade agreement talks may be forthcoming. Even so, the uncertainty of where the trade banter is headed will likely continue to create short-term global market volatility. However, a full-on trade war remains unlikely at this time.

Click the link below to learn more about the threats of trade tariffs:
Trading Tariff Threats

Sincerely,

Mustard Seed Advisors


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