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Thursday, 05/09/2019 10:19:52 AM

Thursday, May 09, 2019 10:19:52 AM

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É....I would say, this is one of the best explanations of our market going forward, that I have read in quite a while. I agree with it wholeheartedly. (the bolded parts were done by me)



In April last year, the first shot was fired in the US-China trade war. By September, the trade war began in earnest.

While no one thought it was going to amount to much – mutual assured destruction of the economic kind would certainly be avoided – it was somewhat surprising that both countries decided to play along.

Remember, China is the No. 2 economy in the world, and in the not too distant future will overtake the United States as the No. 1 economy in the world. There’s an inevitability to it that can’t be stopped, no matter what happens in the US. The sheer fact that China has more than 1.4 billion people means it has consumer marketplace that is close to 4x the size of the US.

And while the US has managed to be the engine of growth for the developing world, China is now taking that mantle as well. It has interests in South America, Central America, Africa, and of course wields massive power in Asia.

It’s even making inroads into neighboring India, another massive state. And where they once were enemies, now there are some worthwhile business opportunities they can both explore without the oversight and meddling of the West.

While many other trade deals have come to pass (or not) since then, the China–US deal is the one the markets have hung their hats on as the engine of growth for the global economy.

Any murmurings good or bad has sent the markets tearing upwards or collapsing downwards. But eventually, the drama cools. Usually the bad news is explained away and good news just keeps the rally going.

So, it was a big deal when President Trump issued 2 tweets this past Sunday that basically said the US will ramp up tariffs from 10% to 25% on $200 billion worth of Chinese goods on Friday and also throw another $325 billion worth of goods under 25% tariffs as well sometime in the near future.

Again, the markets reacted strong overnight and the Asian markets were down significantly. The US market opened down, but ultimately ended the day off by double digits.

The US market didn’t even seem to care. It has worse days when a big company disappoints on earnings and guides lower for the rest of the year. Should we shrug this off?

Following is a primer on tariffs I put together when this whole thing started last year. I thought this might be an appropriate time to revisit it, as this trade war heats up.


At this point, President Trump has made good on his promises to levy a variety of new tariffs. Here’s what we have so far:




• January 23- Solar panels manufactured outside the US will be tariffed at 30% and gradually reduced to 15% over 4 years. The first 2.5 gigawatts of solar panels are tax exempt. Given that China is by far the largest importer of solar panels to the United States, it would appear that this tariff is squarely aimed at China.

• January 23- Washing Machines manufactured outside the US will be tariffed according to an increasing scale depending on the number of machines imported and also by a sliding scale with time. In the first year, the first 1.2 million machines are taxed at 20% and machines imported beyond that amount are taxed at a whopping 50%. After 3 years, this number decreases to 16% and 40% for the same respective volumes. The washing machine tariff originated with one of the few American washing machine manufacturers left, Whirlpool, who petitioned for relief from tough competition from South Korea’s LG Electronics and Samsung. In response, Samsung opened a new washing machine manufacturing facility in South Carolina



Further tariffs have been threatened and are currently under investigation. The weightiest is a proposed tariff on imported automobiles and auto parts from Mexico and from the Europe Union. This began back during Trump’s 2016 campaign as a threat that any American car company that exported auto production to Mexico would receive a 35% tax on those vehicles when they imported them back into the US.

Fortunately, it looks like cooler heads will prevail in the threats over auto import tariffs. This is largely due to frank discussions between the Trump administration and the US auto and parts manufacturers, as well as the EU’s openness to lower tariffs on imported cars from the US.

Below, I will explore the implications these tariffs actually have beyond the propaganda.


The Good



A recent article on spectator.co.uk discusses an interesting justification for the tariffs saying that they are a signal of a big shift in international policy.

Let me explain. After WWII, the US rebuilt societies and industries throughout war-torn Europe and Asia. In today’s money, at least tens of billions of dollars were spent.

On top of that, the US agreed to provide military defense services basically into perpetuity for many of these countries.
This worked fine for decades after WWII when the US was the most financially successful guy on the block, but now the US is beginning to buckle under the weight and needs some relief of its own.

Furthermore, perhaps this asymmetry resulted in a trading field that has not been that level. Military defense is the most expensive endeavor of any state. Imagine how a country could bolster their industries through government funded R&D and outright subsidies if that rather hefty expense is taken care of by someone else.

At the same time, that someone else is also your competitor in selling automobiles, washing machines, robotics, computers, smartphones, etc., all of which require some serious R&D to be successful. There would appear to be some conflicts of interest here.


Perhaps President Trump seeks to find a way to continue paying the US’s international military bills through levying tariffs. What’s a country to do when just asking their ally countries to start paying for their own military is too much pride to swallow? Of course, levying tariffs is the manlier thing to do.

Then why bother China with tariffs? After all, they don’t need or want our hand-outs? Well, some would argue that China has infringed on US patents practically forever without repercussions. The US has taken up numerous complaints with the World Trade Organization without ever receiving full satisfaction. In this case, for the US, perhaps the best lever to pull is the one marked “tariffs,” and believe me, that one is a much better one to pull than the one marked “military action.”


The Bad and The Really Ugly



The best argument against President Trump’s tariffs is that they are ineffective at leveling the field of trading, at convincing your trading partners to play fairly and at improving the economies of either team.

The best and most commonly cited proof of this is the Smoot-Hawley Tariff Act. It was signed into law in 1930 and was policy meant to protect US industries from foreign competition during the Great Depression. Tariffs were raised on over 20,000 products imported to the US.

The US’s trading partners retaliated, and trade nearly ground to a halt. Economists generally agree that the Smoot-Hawley Act’s primary outcome was to exacerbate and prolong the Great Depression.

More recently, President George W. Bush placed tariffs on imported steel in 2002. For years the US steel companies had complained that China and others had been dumping steel in the US market.

President Bush who had signed many free trade agreements into law since taking office in 2000 uncharacteristically agreed to levy between 8 and 30% taxes on imported steel. The tariffs were retired in 2003 because they were negatively affecting the economy.

A post mortem analysis by the US International Trade Commission showed that the number of jobs saved at steel producers was far out-weighed by the number of jobs lost (due to higher priced steel) in industries that purchase steel such as the automotive and kitchen appliance industries. The analysis also showed a $30 billion hit to the US GDP and that each job saved in the US steel industry cost tax payers around $400,000 (washingtonpost.com).

In converse, countries with the most open trade policies have proven to be some of the most successful economies. Take for example, Singapore and Hong Kong. Both countries became British colonies towards the end of the 19th century and were set-up as free trade zones. When Singapore became an independent nation in 1965 it could have pursued protectionist policies like many of its neighbors but instead decided to become one of the most open trading countries in the world.

It is truly remarkable how they managed to go from being a poor third World country of mostly immigrants to one of the richest countries in the World today in just 50 years. For sure, their fortuitous geographical position as a convenient port at the tip of the Strait of Malacca and committed people should take most of the credit, but their smart free-trade policies were formidable enablers.

The island country of Singapore is so wealthy it is known as the Switzerland of Asia.
(source: visitsingapore.com)


Hong Kong is been ranked by many international economic analysis firms as the freest economy in the world. Their government practices a policy known as Positive-Non-Interventionalism which mostly precludes them from interfering with trade through tariffs. Today, Hong Kong has one of the strongest economies in the world and are one of the world’s leading financial centers.

The reality is in the end tariffs cost consumers. Companies that produce and sell goods always find a way to compensate for the extra money they need to pay either for wholesale goods, raw materials or sub-components by either passing the costs on to consumers or cutting costs, usually by cutting jobs.

Even in the case where a protected industry or company benefits by competing against companies that have had to raise their prices due to tariffs, the protected company ends up raising their prices as well because they realize they can get more for their goods than they previously had. The net result is everything ends up costing more which either makes consumers effectively poorer and/or drives inflation.




Just my opinion, of course.

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