tariffs How-meaningful-are-these-ongoing-tariff-threats-

Market volatility has obviously been ramping up as of late, with one of the catalysts being the announcement of various layers of tariffs by the U.S. administration. This rhetoric has been targeted at China, which has responded with a series of their own retaliatory tariffs. These are yet to go into effect in most cases, raising suspicions of these being merely a negotiating tactic to elicit better trade terms with China and other nations, including members of NAFTA, a treaty also under review. Regardless of the intentions, financial markets don’t like the uncertainty this has raised and have responded in kind with more extreme moves day-to-day in reaction to new announcements—certainly more volatility than we’ve become used to in recent quarters.

Despite the rhetoric and strong market reaction, the dollar value of items affected remains limited (less than 0.5% of GDP) and the list of exceptions is growing. The process is convoluted, but many economists hope that this phase is merely a negotiating tactic being used by the administration to gain better leverage in U.S.-China trade agreements as well as with NAFTA—both hot buttons of the administration that surfaced early on the campaign trail. The specific objectives appear to be gaining more favorable trade terms with China, and, in particular, stronger protections for intellectual property, which has been argued as a weak link in recent years (albeit the situation has reportedly been improving gradually). This coincides with Chinese ambitions for better internally-developed R&D and technology prowess, as a component of higher-level economic development, and a graduation from low-end manufacturing, which as largely moved on anyway to lower-cost neighboring nations (such as Vietnam and others).

The U.S. exported about $130 bil. worth of goods to China last year, while importing just over $500 bil.—so a far larger dollar amount would be affected by U.S. tariffs than by Chinese tariffs. In reviewing the composition of Chinese exports to the U.S., the impact is heavily weighted towards computer/data processing equipment, industrial machinery, engines and other electronic parts/equipment. (It is important to note, however, that these relationships are complicated—especially when counting the status of ‘semi-finished’ items that end up being partially assembled in one or more nations and finished in another.) On the other end, key exports from the U.S. to China include autos/parts and chemicals, but the most significant export is soybeans, where one-third of U.S. harvests are shipped out. Soybeans also happen to be grown in the Trump-friendly farm belt region of the U.S.—a fact that isn’t lost on the Chinese. Consequently, aid packages are already being discussed in Congress to help buffer some negative effects should this problem escalate.

All-in-all, though, even with potential escalation to other products, it’s been estimated that U.S. tariff rates overall would increase by under 2% on average, with overall retaliation effects impacting inflation and GDP by less than 0.1%. This trade imbalance limits China’s ability to retaliate, but there remain other important areas subject to possible retaliatory action. These include currency depreciation to help offset tariffs imposed (a classic tactic), unloading a bit of their significant stash of U.S. treasury bond assets (which could have the effect of adding to an already-expanding supply, driving interest rates higher), and/or limiting access by U.S. companies to the Chinese domestic market (unlike goods, U.S. service firms are operating at a trade surplus).

The consensus from a variety of economists and firms offering opinions on the topic is that full implementation of the full brunt of these tariffs still remains unlikely. At the same time, there are a lot of workarounds possible when it comes to trade (using intermediary countries rather than importing items directly) that corporations are quite clever in implementing.

Naturally, the more of a global competitor to the U.S. China becomes, the more contentious these negotiations could be. However, it’s been shown many times that no one wins in a trade war, or at best, the back-and-forth tariffs and restrictions end up a wash, albeit an inefficient one.