Trench warfare continues in what the Chinese Ministry of Commerce describes as “the biggest trade war in economic history.”
In the latest exchange, the Trump administration in early July added $34 billion of Chinese imports to the list of products on which it will impose tariffs and China responded by imposing retaliatory tariffs on $34 billion of American goods. The 545 items targeted by that nation include automobiles and agricultural products.
Although President Trump said in June that he has a “great friendship” with Chinese Premier Xi Jinping, he insisted that, “Trade between our nations, however, has been very unfair, for a very long time.”
“The United States will pursue additional tariffs if China engages in retaliatory measures, such as imposing new tariffs on United States goods, services, or agricultural products, raising non-tariff barriers, or taking punitive actions against American exporters or American companies operating in China,” Trump said. He later raised the prospect of imposing tariffs on an additional $500 billion in Chinese products.
And trade disputes that began with U.S. steel and aluminum tariffs continue with Canada, Mexico and the European Union.
While the nation’s economic indicators do not appear to have been greatly affected by the tariffs yet, some sectors and businesses have indicated that the trade restrictions are becoming too costly for them. For example, General Motors warned that tariffs “could still lead to less investment, fewer jobs, and lower wages for our employees,” while Harley Davidson announced that it will move some production overseas because “the tremendous cost increase, if passed on to its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region.” The president of the American Soybean Association, meanwhile, noted that China is the biggest market for U.S. soybean exports and said, “The math is simple. You tax soybean exports at 25 percent, and you have serious damage to U.S. farmers.”
The U.S. Chamber of Commerce has devoted a section of its website to illustrating the state-by-state impact of tariffs, which it says “are nothing more than a tax increase on American consumers and businesses.”
While the Federal Reserve Federal Open Market Committee raised interest rates for the second time this year at its June 12-13 meeting, boosting the target range for the federal funds rate to 1.75 to 2 percent, the meeting minutes record concerns about the impact of tariffs on the economy.
“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes state. The minutes also note that, “contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy,” and that, “contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity.”
Notwithstanding such worries, job growth in June remained strong, with the economy adding 213,000 jobs during the month, according to the Bureau of Labor Statistics. The unemployment rate still rose slightly to 4 percent, however, as the labor force participation rate grew by 0.2 percent.
The Bureau of Economic Analysis in June significantly increased its estimate of first quarter growth to 2.9 percent, bringing it in line with the preceding three quarters. In April and May, the bureau’s calculations of Q1 growth were 2.3 percent and 2.2 percent, respectively.
Despite the threat of increasing costs, confidence in the manufacturing sector remains high, with the Institute for Supply Management’s Purchasing Managers Index increasing 1.5 points to 60.2 at the start of July. Seventeen of the 18 industries that were surveyed reported growth. Several comments from survey panelists, though, reflect fears of the impact of tariffs, with, for instance, one noting that production at the panelist’s company will be moving from the United States to Canada and another observing that “steel tariffs continue to drive uncertainty. Projects and services using steel have limited days that prices are good for.”
The Conference Board’s measure of consumer confidence dipped 2.4 points to 126.4 in June. (The baseline for the Consumer Confidence Index is 100 in 1985.) The board’s director of economic indicators said, “While expectations remain high by historical standards, the modest curtailment in optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead.”
While the University of Michigan’s Index of Consumer Sentiment recorded a slight uptick in June to 98.2, the survey’s chief economist noted that confidence declined over the course of the month “largely due to concerns about the potential impact of tariffs on the domestic economy.”
“A longstanding belief of consumers is that trade with other countries results in a broader range of available goods at lower prices,” the chief economist said, adding, “While tariffs may have a direct impact on only a very small portion of overall [Gross Domestic Product (GDP)], the negative impact could quickly generalize and produce a widespread decline in consumer confidence.”
Housing starts in May grew 5 percent from April and increased by more than one-fifth compared to May 2017, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales, though, fell for the second straight month, declining by 0.4 percent from April to May, according to the National Association of Realtors.
“Incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market,” the association’s chief economist said.
The dollar ended June trading around what has come to be its usual high level, 0.86 euros, 0.76 pounds, 110.7 yen and 6.62 yuan.
The Dow Jones Industrial Average closed at 24,271.41 on June 29, about 150 points below where it started the month. The S&P 500 Index ended June at 2,718.37 after monthly growth of about 13 points.
Thirty years ago, some in the United States fretted about steel imports from Japan, arguing that that nation was subsidizing steel production to keep the prices of its exports low. The late, great Milton Friedman dispensed with such concerns quickly. “If Japan chooses to subsidize the export of clean air to the United States, why should we object,” Friedman asked. “Isn't that what it's doing when it sends steel here? Here we have this great hue and cry that we should somehow or other subsidize steel, either by tariffs or quotas or other ways, to enable steel to produce both its products and its pollution at home. … Why should we object to their giving us foreign aid?” He further noted that, while imports may reduce the number of jobs in the domestic steel industry, those losses are offset by job gains in other sectors. “Overall, total employment will not be affected,” he said. “But, overall, the American consumer will be benefited because he will get the steel more cheaply and the goods made from the steel more cheaply than he otherwise would.” One should not have to be a Nobel Prize-winning free market economist like Friedman to understand that artificially increasing prices is bad for consumers and the economy, as a whole.
