The Trade War, the US Economy, the Market & How Buying American Can Win It All.
The Trade War, the US Economy, the Market & How Buying American Can Win It All. —First published on 5/26/2019
There is considerable angst in the markets and among the talking heads about the US/China trade dispute which will shortly become a trade war (contrary to my initial expectations).
Rather than take a partisan stance on the issue, I’d like to talk about the math, and also why the US remains better off than we were before the Tax Cuts & Jobs Act, which I now suspect were made specifically to allow the US to tariff China & force better trade arrangements while reducing the trade deficit.
For those that aren’t clear – this is a long term good for the United States and her citizens. And it isn’t going to cost us very much, excepting a bit of misplaced anxiety.
First, some numbers:
According to the Federal Reserve, in 2017 Americans and American companies paid $3.8 trillion in Federal taxes.
In 2018, Americans and American companies paid $3.5 trillion in Federal taxes.
The tariffs that just went into effect raise tariffs from 10% to 25% on $200 billion in product, or $30 billion. In other words, the impact is less than 1% of the taxes paid last year, in a growing economy.
In terms of GDP, the economy grew just over a TRILLION dollars in 2018. So, the change in tariffs represents less than 3% of the GROWTH of the economy. As a slice of the overall economy, the current tariffs represents 0.15% of the economy.
In other words, it’s minuscule.
Now, let’s fast forward and assume the Administration tariffs ALL Chinese goods at 25%. That’s $540 billion (already tariffed at 10%, so the multiplier is 15%) x .15 = $81 billion in total tariffs.
That’s 0.4% of US GDP. ZERO point 4.
Or 2% of US Federal taxes. Given the Tax & Jobs Act, taxes are STILL more than 5% lower than in 2017. (This is good for the economy, and while growth will slow as a result of tariffs, it’s highly unlikely tariff impacts can push the US into recession, a favorite media narrative at the moment).
Combine low interest rates with a dovish Federal Reserve, record low unemployment and the idea the “costs” of a China trade war could push the US in recession are almost laughable.
One more example of the failure of mainstream American media to communicate meaningful information to the American citizenry.
Some other comparisons with the tariff cost of a full-blown trade war:
* Less than the net worth of Warren Buffett, OR Bill Gates OR Jeff Bezos.
* Less than 1 quarter (that’s 3 months) of Apple’s total revenue. Or Exxon. Or Boeing. Or Kroger. Or…
* Equal to what the US government spent in the first 17 hours of January 1, 2018 (The government spent about $111 billion a day in 2018).
* US corporations had revenues of about t $1.4 Trillion per MONTH in 2018. $81 billion in tariffs is equivalent to 5.8% of 1 month’s US corporate revenue.
* US corporations had after tax profits of $1.95 Trillion in 2018. 25% tariffs on $540 billion of Chinese goods is 4% of US corporate profits. Recall US corps picked up a 15% kicker on profits in the Tax Cuts & Job Act. The hand wringing by some CEO’s is nonsense. They are still far better off than they were prior to the tax cuts as is, and will be, the American public.
So, in other words, the actual economic impact of tariffs, outside a few giant multinationals, is negligible. It may cause pockets of transient inflation and pockets of transient earnings weakness among corporations that are totally dependent on China for their supply chains.
I say may because many corporations depending on China will pass some of the cost on to consumers, sacrifice some of the margin gained in the tax cuts, and press their Chinese suppliers for concessions to stay in China (which they will get – this situation is much worse for China than the US.)
American companies are the best in the world at adapting to changing conditions. Thus transient.
Now, evidence of the reason to ignore short term nonsense in the market outside of recession:
If the Administration tariffs all Chinese imports the number is $81 billion. AS Brett Arend observed, on Monday, May 13th, the day negotiations first fell out, the stock market lost over $700 billion. That’s more than 20 years of the current tariffs, nearly 10 of the proposed tariffs in one day.
It’s clear that the market is overreacting again. Let’s hope it continues to overreact in the short term as this presents better opportunities for long term investment success.
It’s difficult to think tariffs can terrify the market for an extended period given the simple reality that $81 billion is basically chump change in terms of the American economy. Plus, the end of the world can’t come everyday. Sooner or later, people have to face the reality that a trade war with China isn’t nearly as big a deal as the media and pundits want it to be.
Certainly it’s nowhere close to as damaging as if the Fed decided to raise interest rates another 1% in 2019/2020.
To wit, let’s pretend that 100% of the tariff costs get passed on to American consumers by corporations because China raises prices by 15% to offset their added tariff cost. That would be equivalent to the Federal tax rate to GDP rising from 17.16% of GDP to 17.65%. That’s tiny. Almost a rounding error.
Put another way, the tariffs could theoretically cost every American the equivalent of adding 2.4% to their tax bill.
For most Americans, the average income taxes paid are somewhere in the $6000 area. So, tariffs could theoretically cost the average American as much as about $156 a year, and that assumes corporations pass on 100% of their cost increases and the Chinese refuse any concessions.
Corps will pass part on in higher prices, they will also absorb some by giving up some of the fatter margins they have thanks to the Tax Cuts and Jobs Act, and the Chinese have to be smart enough to know that 10% of 100 is way better than 30% of zero. They will give up a little, too.
And Americans will still go to work, put gas in their cars, and buy things. Lots and lots of things.
Winning the Trade War
I can’t speak for everyone, but I’m willing to forego a couple nights out per year (that $156 I talked about above) to stick it to an oppressive communist human rights violator that steals American technology, talks about war with the US at semi-regular intervals, and demands we pay them $380 billion a year for the privilege (the trade deficit in 2017).
In the spirit of Memorial Day and all the sacrifices that have been made for this country by its men and women in uniform, it’s time to buy American again wherever possible — China is spending much of the money they get in the trade deficit to upgrade their military.
This isn’t a happy development for those in uniform, or the long term good of America. Buying American strengthens us and our military while weakening a burgeoning Super Power that has openly stated they are willing to go to war with the US over a number of reasons.
Start checking labels. Pay a little more to support American workers, American companies, and especially to deny military parity to the Chinese, whenever you can.
Americans like to win. Buying American is the surest way to win the trade war while denying China the ability to become the true military threat to the US it aspires to be.
Happy Memorial Day to you all. I hope you take a moment to remember the sacrifices our military makes, and to consider the threat a communist military super power represents to them (and us), and allow that to guide your purchasing.
As always thank you for the privilege of your partnership with my firm and I.
Invest Smarter. Live Better. Expect a difference.
Statistics taken from the St. Louis Federal Reserve Economic Research (https://fred.stlouisfed.org/)
I have also borrowed from Brett Arends’s article on Market Watch aptly entitled The Media Is Lying to You About Trump’s China Tariffs.