With the trade war with China kicking off in earnest on July 6th, let’s take a look at what impact this, along with trade disputes with Canada, Mexico and the EU, may have on the U.S. economy.
While there has been a lot of “the sky is falling” rhetoric flying around, the actual numbers don’t add up to panic mode. The tariffs on Chinese goods that went into effect on July 6th were a 25% tax on $34B of Chinese goods. And they have responded in kind.
That’s a paltry $8.5B when the U.S. imported $478.8B of goods and services from China in 2017. And, for a little more perspective, the U.S. economy is expected to total $20 Trillion in 2018. $8.5B doesn’t even amount to a rounding error. (By the way, Apple, Inc. (NASDAQ: AAPL) made over 5 times that in 3Q alone last year.)
While the overall numbers are small, that isn’t to say that there will be no impact. U.S. soybean prices have tanked as China has retaliated. But, even there, prices are only back to 2015 levels.
In addition to the Chinese tariffs, the U.S. has imposed tariffs on steel and aluminum in both Canada, Mexico and the EU. In total, these tariffs are on approximately $23B worth of goods so far.
But, if the trade war remains relatively narrow, the Bank of England estimates that the impact will be negligible.
“Bank of England simulations suggest that the impact of narrow, bilateral tariff increases through direct trade channels would tend to be small – reflecting the small share of overall exports affected – and would be largely confined to the countries directly involved.” – Mark Carney, Governor of the Bank of England
To put a few more numbers to it, Oxford Economics has projected the impact on U.S. GDP if additional tariffs are imposed on the EU. In a worst case scenario, if tariffs on automobiles coming from the EU are enacted, Oxford Economics estimates the impact at .1% of U.S. GDP lost in 2019.
Finally, Goldman Sachs Group, Inc. (NYSE: GS) has said the trade war scare is overblown and that commodities impacted by the trade war are a buy. Global growth, depleted inventories, and supply disruptions are more than enough to offset trade war impacts.
While a trade war makes for great headlines, investors should keep their heads and look at the numbers. Make your investments based on the facts, not the hype. At these levels, the trade war currently being waged should have little to no impact on most investment decisions.
Article By: Steven Adams
