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US-China Trade War Drives $1.7 Trillion Market Cap Loss, Federal Reserve Bank Finds

The United States-China trade war has slashed American companies’ profitability, according to a new report, and that blow brought many brands and retailers into the year of the pandemic in a weaker position than they would have been.

In just over a year, the average tariff rate for U.S. imports rose from 2.7 percent to 17.5 percent thanks to new tariffs imposed on $300 billion worth of goods from China, according to a report released Thursday by the Federal Reserve Bank of New York. As China retaliated for what has been President Trump’s at-all-costs effort to bring the trade relationship with the Asian powerhouse into better balance, the average tariff applied on U.S. exports to China jumped from 5.7 percent to 20.4 percent.

“The trade war reduced U.S. investment growth by 0.3 percentage points by the end of 2019, and is expected to shave another 1.6 percentage points off of investment growth by the end of 2020,” the Federal Reserve report noted.

Because U.S. businesses “bore virtually all of the cost of higher U.S. import duties,” according to the Fed, the expected profitability of their operations also took a hit. At the same time, those that export to China, whether directly or indirectly, became less profitable because the tariffs made them less competitive. What’s more, researchers noted, “The trade war seems to have caused a slowing of the Chinese economy, which, in conjunction with the possibility of China imposing new non-tariff barriers on U.S. firms, likely diminished the returns firms made on investments in the Chinese market.”

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And even companies that don’t deal directly with China have paid a price for the trade war.

“U.S. tariff announcements may have raised the expected profits of domestic firms that compete with Chinese imports,” the report noted. “Heightened trade policy uncertainty and reduced demand from firms that are dependent on the Chinese market may have affected the profitability of firms that were not directly exposed to China. Moreover, their U.S. suppliers may have raised prices, either because they import from China or because they could increase markups due to a decrease in import competition.”

In short, the trade war hasn’t done as much to shore up domestic manufacturing as intended as it has to damage fashion businesses’ already fragile financial footing. And when profitability falters for companies with exposure in China, so does investment.

Because U.S.-China tariff announcements were, on average, tied to substantial stock market declines, and despite some bounce-back in ensuing days, the tariffs served to lower companies’ expected profits, the Fed said. All of this, according to the report, “depressed equity prices by 6 percent, translating into a $1.7 trillion loss in market capitalization.”

And the damage may be far from over. The trade war, based on the Fed’s findings, reduced U.S. investment growth by 0.3 percentage points by the end of 2019 and it’s expected to slash another 1.6 percent points off of that investment growth—which companies will be in dire need of as they look to reimagine supply chains for a post-COVID-19 future—by the end of 2020.