Since President Trump’s inauguration, trade war fears have dictated the markets. The market drops when Trump makes a new tariff threat, and rallies when Trump talks about getting closer to a trade deal. These trade conflicts have mostly remained between the U.S. and China, but other countries like Mexico, Japan and Canada have also entered the fray. Even the European Union has been subject of tariff threats.
Trump’s “one-year warning” for Mexico to stop illegal drug smuggling over the U.S.-Mexico border is the latest in a slew of trade-related headlines. According to Trump, if Mexico doesn’t comply, the United States will levy a 25% tariff on Mexican car imports.
In early April 2019, Trump tweeted a warning that “those serving Roquefort or Gouda may soon be subject to new tariffs,” according to Forbes. This essentially equates to potentially $11 billion of new tariffs against the European Union. Several days later, the EU returned with a retaliatory proposal equating to $22.6 billion in tariffs on various U.S. imports.
The bulls have been pinning their hopes on trade deals ‘coming soon’ for months, while the bears proclaim each new trade headline as the end of global growth as we know it. Each day gives more fuel to each side. With so much noise from the press and the White House, it’s best to look at hard numbers.
What Is Going On?
Since U.S. President Donald Trump’s inauguration, he has been agitating global superpowers, mainly China on global trade practices. It was a key part of his election campaign, and he began taking action in August 2017 with an investigation into China’s intellectual property policies.
Since then, it’s been said that we’re in a “trade war,” with both nations levying tariffs upon each other.
In total, the U.S. imposed $250 billion worth of tariffs on goods from basic materials like aluminum to consumer goods like food and tobacco products. You can read the full list here. Overall, China imposed $110 billion worth of tariffs on goods from automobiles to soybeans, a commodity mostly produced in Republican states.
Trade War’s Effect On The U.S. Economy
When talking about trade wars, most pundits focus on the effects being felt domestically. Let’s take a look at a few indicators to gauge the effects of the trade conflicts so far.
Purchasing Managers Index (PMI)
The PMI measures the economic activity in the manufacturing sector, and is considered a reliable leading indicator for the performance of the US economy. The data is collected through surveys of purchasing managers in key manufacturing industries.
Despite Trump’s ramping-up of the U.S.-China trade war in summer of 2018, and continued trade spats with other world powers, the U.S. economy has experienced 119 consistent months of growth.
However, the average manufacturing PMI during the first quarter 2019 was the lowest seen since the third quarter 2017. Furthermore, factory activity saw its slowest growth since June 2017, as output and new orders softened. Previously, the U.S.’s manufacturing PMI was in an overall uptrend, which saw strong growth between early 2016 and 2018. During this time, manufacturing PMI grew from around 51 to over 56.
Effect on Companies and Consumers
While both the PMI and the S&P 500 are showing positive signs, there are consequences that are not showing up in those indices. Namely, those consequences are hurting U.S. consumers and companies.
A study done by economists from Princeton, Columbia, and the Federal Reserve Bank of New York concluded that the tariffs imposed by Trump in 2017 cost consumers and companies about $3 billion a month in additional taxes, and companies another $1.4 billion in additional losses.
Trade War’s Effect on Global Economy
Global trade growth has declined as a result of the trade tensions, however, that hasn’t derailed the growth of global GDP, as we can see in the chart below.
While this can be a source of optimism, it might not tell the complete story. The folks at the World Economic Forum have modeled what the effects of a global trade war might look like. To summarize, their model projects that global GDP growth would be reduced by between 0.7% and 2.8% in 2019, and that Latin America’s growth would slow-down significantly as a result.
IHS Markit publishes a PMI index for China, which surveys purchasing managers in key industries. When looking at PMI, we can see that China’s manufacturing sector has been hit harder by tariffs than the United States, with China’s PMI slipping into contraction levels in January 2019. This Chinese manufacturing PMI hadn’t seen a contraction happen in 19 months.
Looking at the data, we can see that the term ‘trade war’ might be a bit alarmist at the moment. Both nations have taken their minor hits, but for the time being, a more accurate term would be a “trade skirmish,” in the words of Jamie Dimon.
With that said, uncertainty still looms over markets until a deal is struck with China and the “war of words” ceases with EU, Canada, Mexico, and others. Ultimately, the trade situation between China and the United States will continue to take center stage and focus, as there are further trade negotiation talks scheduled that will be widely watched.
The economy is not the stock market and the stock market is not the economy. While central banks continue to be extremely accommodative and helping the longest bull market in history continue to hobble along, lawmakers need to continue focusing on helping strengthening the underlying economy. Trade is a major component of a country’s Gross Domestic Product (GDP) and threatening a global trade war will only cost everyone dearly.
Article By: Patrick Crawley