On Wednesday afternoon, administration officials said Donald Trump has directed Robert Lighthizer to ponder hiking the proposed tariff rate on an additional $200 billion in Chinese goods to 25% from 10%.
That confirmed Tuesday evening’s reports that another escalation in the trade war may be imminent.
Officials did caution that nothing is finalized. Public hearings are scheduled for August 20-23 and according to the administration, the President is “open” to further discussions if China is willing to “address concerns”. Steve Mnuchin is said to be in talks to try and restart negotiations with Chinese Vice Premier Liu He, with whom the Treasury Secretary struck a short-lived trade “truce” back on May 19, after two days of talks in Washington.
The administration on Wednesday emphasized the importance of “countries” not resorting to currency devaluation in an effort to gain a competitive edge. That’s just a euphemistic way of saying that Trump is not thrilled with the math thus far. Goldman, Deutsche Bank, JPMorgan and others have all noted that the yuan’s recent declines effectively served to zero out the effects of both the first round of tariffs (on $50 billion in Chinese imports) and the prospective second round (10% duties on an another $200 billion in goods) before they’ve even been fully implemented.
“Based on [our] estimates, the roughly 6% CNY TWI fall since the mid-June peak should map to a 40-50bp support to GDP, which would essentially offset our estimated direct growth drag from the first two rounds of US tariff measures”, Goldman wrote late last month.
Deutsche Bank said the same thing two weeks ago. “The nearly 10% USD/CNY move since March has almost completely offset the impact of Trump’s potential tariffs before they have even happened”, the bank said, adding that “perhaps this is why the US President’s Twitter feed has turned back to talking down the dollar.”
Yes, “perhaps.” Or actually yes, for sure. And it’s also why Trump is attacking the Fed.
Never let the irony inherent in all of this be lost on you. On Wednesday afternoon, in the course of covering the Fed statement, we noted (again), that the current situation wherein the policy divergence between the U.S. and America’s trade partners is leading to a stronger dollar and thus helping other countries weather the tariff storm is yet another example of the President’s policies tripping over themselves. Here’s an excerpt from the full Fed piece:
In an irony of ironies, the reason [rate hikes] are necessary is because when you pile fiscal stimulus atop an economy operating at full employment, you risk overheating that economy and driving up inflation. On top of that, the tariffs also risk pushing up domestic prices. Indeed, there’s evidence to support the contention that protectionism exerts steepening pressure on a Phillips curve that would already be inclined (get it? “inclined”) to reassert itself in a late-stage expansion.
In short, Trump’s pedal-to-the-metal fiscal policies are part of what’s forcing the Fed to lean hawkish. The tariffs only raise the chances that inflation will overshoot, thus giving Jerome Powell another reason to keep hiking. The more he hikes, the wider the policy divergence and the stronger the dollar. The stronger the dollar, the more angry Trump gets and the more inclined he is to escalate the trade war even further, and around we go in an insanity loop that dead ends in a global recession. That’s not hyperbole. That’s where this appears to be headed.
Analysts have long cautioned that beyond the first round of 301 tariffs (i.e., the duties on $50 billion in Chinese goods), the administration will find it harder and harder to avoid driving up consumer prices. And while some analysts believe the list published on July 10 in conjunction with the proposed tariffs on the additional $200 billion in imports was designed to avoid pushing up domestic prices, you can’t skirt the inevitable forever if the end game here is to tax everything China imports into the U.S.
“The imposed tariffs also are likely to boost inflation but the effect should be modest”, Goldman wrote, in a note dated July 9, following the imposition of duties on $34 billion in Chinese goods.
“With the tariffs implemented on July 6 now in effect, we estimate that tariffs will increase core PCE inflation by a cumulative 4bps year over year over the next several months”, the bank continued, before cautioning that “if the White House follows through with all of the proposed tariffs over the next several months, the total effect could reach 20bp.” Here’s a visualization of the math:
Last week, SocGen’s Omair Sharif spent quite a bit of time documenting the read-through for inflation if Trump does indeed move forward with tariffs on an additional $200 billion in Chinese goods. “Unlike a similar $50 billion list unveiled in April, which was composed largely of industrial supplies and components, the proposed $200 billion tally includes a slew of finished consumer items”, Sharif wrote, referencing the USTR list published last month, before reminding you that “according to the Peterson Institute, consumer goods account for about $44 billion, or nearly 23%, of the proposed list.”
He went on to explain what this would mean for inflation as follows:
With about 4.5% of the core CPI subject to a 10% tariff, and assuming that it is entirely passed on to consumers, the impact from the implementation of the tariffs would be around 45 bps on the yoy core CPI rate. As we saw with tariffs on laundry equipment this year, tariffs on household appliances could ripple through into retail prices relatively quickly.
Again, that assessment was based on the assumption of a 10% tariff on the new list. On Wednesday afternoon, Bloomberg was out underscoring the point made above about how this muddies the waters for the Fed and in their piece, they mention SocGen’s Sharif and what the prospect of a 25% tariff on those same goods would mean for consumer prices. Here’s the relevant excerpt:
Implementing the tariffs would complicate the Federal Reserve’s decision-making on interest rates. Omair Sharif, an economist at Societe Generale in New York, said a 25 percent tariff on the entire $200 billion product list could cause inflation to surge by 1.1 percentage point. Assuming the levies get passed along to customers, the annual increase in the consumer price index, excluding food and energy, would jump to 3.4 percent from the current rate of 2.3 percent.
Starting to get the picture? If not, let Apple’s Tim Cook explain it to you in layman’s terms (from the company’s second quarter earnings call):
In terms of the tariffs themselves, maybe I could sort of take a step back because I’m sure some people have questions on this. And our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences.
These tariffs amount to a tax on consumers and because we’re all consumers, they are a tax on all of us.
End of story.