The United States economy and business confidence may be humming along now, but both could see some major negative repercussions should President Donald Trump make good on his threat to raise tariffs on Chinese goods.
Ryan Sweet, economist at Moody’s Analytics, said the tariffs, if imposed, “could throw a wrinkle in the negotiations that appeared to be nearing a deal.”
Sweet added that the impact of the trade tensions is “clearly affecting global equity markets and the supply chain, boosting some U.S. consumer prices, but the most significant hit has been to business confidence.” He explained that a weekly measure of global business confidence tracked by Moody’s dropped sharply and hasn’t yet recovered.
UBS economist Robert Martin, said Monday that the economic effects of a full-blown trade war will be large. In November, when tariff threats were first raised, Martin estimated that a 25 percent tariff on $200 billion would “subtract 45 basis points,” or nearly half of one percent, from global GDP growth.
While Martin on Monday said he hasn’t yet done a full analysis on what the latest threat would mean, he did note that “an escalation of the trade war would be quite harmful to the U.S. economy.” He explained that while the U.S. manufacturing sector saw a rebound, “any hope of another surge in manufacturing firms is likely to be quashed by a new round of tariffs.” He is presuming for now that trade talks continue, pending indications to the contrary over the next several days.
Michael Lasser, UBS’ equity analyst, said Monday that he believes a tariff hike of 25 percent, presuming it persists for an extended period, would hurt many hardline, broadline and food retailers. “The brunt of a full 25 percent tariff would likely be quite inflationary as the retailers have indicated they would use strategic price actions where possible to mitigate the impact.”
Simeon Gutman, equity analyst at Morgan Stanley, said that if a 25 percent tariff is imposed on 100 percent of goods coming in from China, retailers such as Bed, Bath & Beyond, Dick’s Sporting Goods and Williams-Sonoma Inc. would be most impacted. The least impacted would be Home Depot Inc., Ulta Beauty Inc., Target Corp. and Walmart Inc., Gutman noted. The information is extrapolated from data the retailers previously provided concerning the China cost of goods sold that were impacted on the initial $200 billion of goods.
Trump on Friday said of the negotiations with China that the deal was “going along pretty well,” but then in an about face on Sunday through two tweets gave the impression either that those discussions aren’t moving fast enough toward a resolution or he’s trying to apply some pressure to make sure negotiations this week–if they actually take place–result in a deal. First Trump said he planned to hike tariffs on imports from China to 25 percent from 10 percent on $200 billion in goods this Friday. Then in the second tweet he threatened imposing 25 percent on another $325 billion in goods–essentially all goods coming in from China–that are currently untaxed. He has threatened to raise tariffs before, although some were put on hold so the two countries could continue trade negotiations. Currently the tariff is 25 percent on $50 billion of imported goods from China, and 10 percent on $200 billion.
David French, National Retail Federation’s senior vice president for government relations, citing a report from Trade Partnership, was quick to note that “increasing tariffs on $200 billion of goods to 25 percent, along with tariffs already in place and retaliation, would reduce U.S. employment by over 934,000 jobs, cost the average family of four $767 and reduce U.S. GDP by 0.37 percent.”
That comment is contrary to Trump’s tweet that current tariff payments “are partially responsible for our great economic results.”
According to data tracked by Moody’s Sweet, “The Trump administration’s protectionist policies have increased the average tariff rate on all U.S. imported goods from 1.5 percent at the end of 2017 to 2.9 percent at the end of last year. Federal customs receipts nearly doubled over the same period, and given the modest gain in nominal imports, the increase in customers receipts is almost entirely attributed to the tariffs.”
The president further tweeted on Monday: “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!”
Morgan Stanley strategist Michael D. Zezas said that while a tariff hike is expected to be temporary, “any escalation inherently augments uncertainty and further undercuts risk markets, where a Goldilocks outcome was already priced in.”
A Goldilocks outcome is considered ideal, one where the economy is not too hot and not too cold. At the end of April, U.S. government stats indicated in a surprise report that first-quarter gross domestic product rose 3.2 percent, above the 2.5 percent rate many economists were expecting. Since then the Federal Reserve last week seemed to have shifted its stance regarding inflation, noting the factors it was reviewing are “transitory” in nature. On Friday, the jobs report came in strong, suggesting that the U.S. economy is gaining strength, contrary to the slowdown that many economists were expecting.
Zezas observed, “The strong rally [year-to-date in the stock markets] has been fueled by the Fed’s pivot and an apparent constructive shift in U.S.-China trade negotiations. With optimism pushing the equity market close to our bull case, negative surprises like a potential re-escalation of trade tensions can have a greater price impact than fundamentals might dictate.”
For now, there seems to be a wait-and-see attitude among some economists as they watch for signs on what the political antagonists will do next, suggesting that perhaps Trump’s threat is being viewed as a negotiating tactic.
Martin’s UBS counterpart in Hong Kong, Tao Wang, who tracks the Chinese economy, said Monday that it wasn’t immediately clear what triggered the sudden shift in the U.S.’s position, or whether it was simply a political maneuver to move the talks further along.
Wang also discounted rumblings that China might cancel the planned trade talks in the U.S. that are scheduled to begin on Wednesday. He noted that China’s Ministry of Foreign Affairs said the “Chinese delegation is still preparing for additional trade talks with the U.S. pending further information.” Moreover, Wang did have one bit of potential good news, and that’s that China is “unlikely” to retaliate if tariffs were hiked on the $200 billion of goods to the U.S., provided there’s no additional higher tariffs on the rest of Chinese goods entering the U.S.
U.S. equity markets at the start of Monday’s trading session saw steep declines as spooked investors tried to figure out what the latest Trump tweets might mean and what could happen next. By the end of the trading session, Wall Street seemed to shrug off its initial fears.
Among the major U.S. indices, the Dow Jones Industrial Average regained most of its losses, falling just 66.47 points, or nearly 0.3 percent, to 26,438.48. The Nasdaq Composite Index, fell just 40.71 points, or 0.5 percent, to 8,123.29 points.
Among the retailers, Walmart shares rose nearly 0.4 percent to close at $102.46, while Target’s stock rose nearly 0.1 percent to end the session at $75.98. Shares of Nordstrom rose 0.8 percent to close at $40.62. Among the off-pricers, TJX Cos. Inc. rose 0.3 percent to $54.19, while Ross Stores also rose 0.3 percent to $97.39. Burlington Stores, however, saw its shares fall 0.2 percent to $172.11. Other retailers also posted losses: Abercrombie & Fitch Co., down 1.7 percent to $29.96; American Eagle Outfitters Inc., down 2.5 percent to $23.52; Gap Inc., down 1.2 percent to $25.66; Kohl’s Corp., down 0.4 percent to $68.90 and Macy’s Inc., down 0.2 percent to $23.20.
Among the apparel and footwear firms, G-III Apparel Group Ltd. dropped 8.0 percent to close at $39.92; Guess Inc. declined 7.2 percent to $18.94; PVH Corp. fell 2.5 percent to $123.98; Nike Inc. lost 2.5 percent to $83.57, and Ralph Lauren Corp. was down 2.3 percent to $128.22. Two companies that saw gains were Tapestry Inc., up 1.0 percent to $31.52, and Levi Strauss & Co., which rose 0.4 percent to $22.69.