28 Sep Tariffs

Trump Administration Announces Tariffs

The Trump administration announced 25% tariffs on $50 billion worth of imports from China that are focused mainly on aerospace, information and communications goods and machinery. These tariffs are in addition to the steel and aluminum tariffs imposed a few weeks ago and are also imposed under section 301 of the 1974 trade act. Section 301 allows the president to impose tariffs without legislation in the interest of national security, which the administration is claiming is threatened by Chinese trade and IP practices. The Chinese government pledged to retaliate against U.S. but did not specify exactly how.

Headwind to Growth

U.S. stocks fell 4.6% over two days in response to the Trump administration announcement and the Chinese pledge of retaliation. The Chinese stock market slid to the point that the government intervened to support prices. These moves indicate concern about the impact of a possible trade war on global growth.

What Now?

The question over the coming weeks and months will be whether the U.S. and China are able to negotiate some resolution to the current trade dispute or if the two nations slip into a tit for tat escalating trade war with more and more trade subject to higher and higher tariffs and restrictions. During his campaign the trade deficit and Chinese practices were a significant focus for Trump, but his administration seemed more focused on tax cuts and deregulation for the first year. A pivot to a trade war with the second largest economy in the world would work against the pro‐growth impetus of the administration’s first year policy focus.

The potential for an increased headwind to growth from a trade dispute between the U.S. and China is just one more possible driver of a global slowdown alongside the Chinese debt overhang, the potential for a hard Brexit, the need for central banks to unwind extraordinary stimulus and the need for long term fiscal consolidation in the U.S.