After the Trump Administration announced that it would impose 10 percent tariffs on another $200 billion worth of Chinese goods, starting Monday September 24 – and then the Chinese said they would retaliate with 5-10 percent tariffs on $60 billion of U.S. goods, the stock market rallied…and then kept on going up, throughout the week. The proximate rationale for the bump was that tariff levels were lower than expected and on the U.S. side, excluded a number of consumer-friendly goods, like iPhones, smart watches and sneakers.
So what’s going here? The answer is that the U.S. economy is more than strong enough now to easily absorb the impact from the tariffs. Most economists expect that tariffs will subtract 0.1 to 0.2 percent from growth this year, which is expected to come in at about 3 percent. Even if the trade wars continue into 2019, when the tariff amount will increase to 25 percent, most anticipate a maximum of a 0.3 percent dent to GDP.
It may seem weird to consider, especially as President Trump has threatened to extend tariffs to another $267B of Chinese imports, which in turn would likely trigger another Chinese retaliation of tariffs and other measures, but “the macroeconomic impact should be small,” according to analysis from Capital Economics.
While an “an all-out trade war between the U.S. and China would have major implications for the sectors directly affected,” there are other mitigating factors that are blunting the impact, including: the falling value of the Chinese renminbi against the dollar; the redirection of trade to other partners; the fact that bilateral China-U.S. trade accounts for only a fraction of each country’s GDP (while China and the U.S. account for a combined 22 percent of world exports, bilateral trade between them accounts for just 3.2 percent); and tariffs are likely to have just a “small” impact on inflation, despite Walmart’s warning that the trade actions would force the company to raise prices on products from shampoo and bicycles to food. The bottom line may be that “protectionism would need to spread well beyond China and the U.S. in order to deliver a significant hit to global GDP.”
Meanwhile, last week saw the release of data points that underscored the economy’s strength: the Conference Board said that readings on consumer and corporate confidence were at their highest level since 2000, weekly jobless claims fell to a 49-year low and the total net worth of U.S. households rose to new record levels at the end of the second quarter, at least on a nominal basis.
Given the pace of growth, the Federal Reserve will almost certainly raise interest rates by a quarter of a percent to a new range of 2 to 2.25 percent, when their two-day policy meeting concludes next week (Sep 26). If so, it would be the third quarter-point increase this year and the eighth since the current rate tightening cycle started in Dec 2015.