By Joe Higgins
Tariffs and trade wars have been in the news for the past twelve months, and the consequent uncertainty has plagued economists, CEOs and small business owners alike.
This past spring, I spoke at BrandSource’s Pac Rim Regional Meeting in Sacramento just days before the Trump administration announced $300 billion dollars in tariffs on China and sent an armada of warships toward Iran. A month later there were threatened tariffs on Mexico, our largest trading partner, and on India, the world’s fastest growing economy. It is becoming increasingly difficult to predict our economic direction given the uncertainty we seemingly deal with every day.
Given America’s $13 trillion consumer market, the assumption is that trade wars are “easy to win.” U.S. consumers are an indomitable force, unlike any other in the world, giving us the largest consumer economy on the planet, and as a result we set the global agenda for trade.
But let me take you back to the last big trade war, that began with the passage of the Smoot-Hawley Tariff Act of 1930. The legislation sought to protect American farmers and businesses from foreign goods and was based on a call for “America First,” as talk of protectionism gained momentum after the stock market crashed in 1929.
Economists wanted nothing to do with this plan, however, and 1,000 of them urged President Herbert Hoover to veto the act. Nevertheless, he signed it into law on June 17, 1930.
Smoot-Hawley signaled that the U.S. was now moving toward isolationism, and the act prompted foreign governments to retaliate by placing tariffs on American goods. It set off a trade war that sparked a global slowdown, exacerbated the Great Depression, and reduced global trade.
Nearly a century later we find our world in a similar place. Tariffs have been placed on Canada, Mexico, China, the Eurozone and other countries, and they’re having an outsized impact in a much more interconnected world than the one that existed in Hoover’s time. I think the current Administration’s calculus assumes that the extremely powerful American economy isn’t dependent on a global economic marketplace. That would be a bad assumption, as we are in the late stages of the longest recovery in U.S. history, and the economy is waiting for something like a trade war to set it adrift.
Consider this: tariffs have devastated soy bean farmers. China has found new suppliers for this crop, many of our farms have been forced into bankruptcy, and this is having a reverse multiplier effect on the farm industry. For example, farm equipment manufactures like John Deere are struggling, Chemical companies like Dow and DuPont have reported lower revenues, and trucking companies that deliver produce are reeling.
This scenario repeats itself in other industries as supply chains are broken, costs skyrocket, and revenue moves in a negative direction despite an American economy that is still showing strength.
Equally important is the fact that China does not pay for tariffs. It is a tax borne by the importers who bring product into our country. American companies pay the tariffs that eventually get passed on to consumers.
When I look deep into my crystal ball, I see an uncertain economic future due in part to tariffs. I see that the yield curve inverted again on March 22, and on July 7 the 10-year Treasury note was still lower than the 3-month T-Bill. Meaning? An inversion lasting more than 30 days, like this one, has traditionally been a strong indicator of coming recessions.
There are other warning signs as well. There is a global slowdown in manufacturing; the May Purchasing Managers Index report (PMI) missed Wall Street estimates by a wide margin and was down for the past six months; and the sentiment index for manufacturers was the lowest we have seen in nine years.
And if that’s not enough, June copper prices were down 9 percent month-over-month; credit use, including personal and corporate credit, is now at an all-time high; and the U.S. deficit and debt have reached historic highs. All negative signs.
Yet some good news came out of the recent G20 summit in Osaka, Japan, where President Trump decided to drop restrictions on Huawei Technologies and postpone tariffs on $300 billion in Chinese imports, while China’s President Xi agreed in principal to buy American soybeans again. I believe this signals the end of the trade war.
So where are we now? The American economy is still in good shape, with unemployment at 3.7 percent, the June jobs report beating expectations, and the first quarter GDP coming in at 3.1 percent. The stock market was still up at press time, although its future performance depends on Q2 earnings results, any interest rate moves by the Fed, and the outcome of the trade wars.
Peter Boockvar, the chief investment officer at Bleakley Financial Group, said it best: “Tariffs can be thrown around as an economic bomb for anything now.” While Boockvar makes a great point about the devolution of tariffs, which appear to be used now for political purposes as well as economic threats, my biggest concern is how these actions are affecting small businesses and their supply chains.
A real tariff compromise over the next quarter would restore confidence and remove the uncertainty that has been plaguing our economy. So stay positive about the possible outcomes; we will know more about the future of our economy when the second quarter GDP numbers come out this month.
YSN is published by BrandSource parent company AVB Inc.