By Clive McKeef
Indeed St. Louis Federal Reserve President James Bullard said Tuesday the U.S. central bank can’t be expected to react to every twist and turn of a trade war. The Fed “can’t realistically move monetary policy in a tit-for-tat trade war,” Bullard said, in an interview with Agence France Press.
Traders on Monday raised the chances of a half percentage point interest rate cut at the Fed’s September meeting as bond yields /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +11.09% tumbled. Bullard said the Fed has already done “quite a bit” to help cushion the economy from the uncertainty generated by the trade policy dispute. The St. Louis Fed president voted in favor of the central bank’s decision to cut its benchmark interest rate by a quarter-point last week and said he has one more rate cut “penciled in” for this year.
In total so far the Trump administration has imposed at least a 20 percent tax on the roughly $500 billion worth of goods the U.S. imports from China each year.
“So that’s a $100 billion a year tax hike... and I don’t think it’s outlandish to suggest that the overall anti-stimulus from the Trump tariffs is comparable in scale to the stimulus from his tax cut... And that stimulus is behind us, while the drag from his trade war is just getting started,” Krugman argued.
The latest tariffs suggest a vicious circle may lie ahead. Trump raises tariffs and this leads to Chinese currency depreciation, which yields complaints by Trump about tariff evasion and currency manipulation, and then more tariffs are likely. But neither the U.S. nor Chinese economies are suffering enough yet to force a trade deal. Indeed, analysts believe China’s president Xi, who does not face re-election, is ready to wait until next year’s U.S. elections and has canceled agricultural purchases from U.S. farmers who are often Trump voters.
However, other analysts are not so sure that the U.S. consumer has suffered yet. “One analysis has shown that the tariffs (excluding the latest round) raised $72 billion, equivalent to one of the largest tax increases in recent history”, Putri Pascually, managing director or PAAMCO Prisma noted. “However, US consumers have not seen an increase in prices - so who is bearing the tariff?”, he asked. “China is giving US taxpayers a tax cut via the weakening of the yuan, which makes Chinese goods cheaper and thus offsets the tariffs,” he said. And “uncertainty from the trade war also, paradoxically, makes the US dollar stronger which makes the Chinese imports cheaper”.
The Chinese yuan has fallen by more than 10% against the U.S. dollar in the past year to its lowest level in a decade as the trade war has escalated.
Trump has usually placed great store in the rise of the U.S. stock market, believing it reflects the strength of the U.S. economy under his presidency, so perhaps he will call a truce rather than risk a falling stock market or a recession going into the 2020 elections.
But analysts are becoming increasingly skeptical that the Trump administration can negotiate a trade with China anytime soon. Goldman economist David Mericle said Goldman no longer expects the US and China to agree on a deal to end their trade war before the November 2020 presidential election as policy makers from the world’s largest economies are taking a harder line. Goldman’s “base case is now that no deal will be reached before the 2020 election,” he said in a note. “The balance of risks has shifted enough to make a third 25 basis point rate cut in October the most likely outcome, for a total of 75 basis points of cuts including the July cut.”
While the macroeconomic impacts may be limited, the potential risks to commodity markets and the global technology supply chain remain significant, J.P. Morgan analysts argued in a note. “If the additional tariffs on Chinese imports takes effect, the economic implications are significant for China, with the potential to drag down China’s GDP by as much as 0.3% through direct and indirect impacts,” J.P. Morgan’s Haibin Zhu wrote.
The National Retail Federation, the Footwear Distributors and Retailers of America, and the American Apparel & Footwear Association all warned that Trump’s threat to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1 will hurt consumer purchases, raise prices further and dampen hiring.
Farmers have already been badly hit this season. In retaliation for the U.S. import tariffs, Chinese companies have stopped buying U.S. agricultural products, China’s Commerce Ministry said on Tuesday, a blow to U.S. farmers who have already seen their exports decimated by the more than year-old trade war.
American Farm Bureau Federation President Zippy Duvall called the latest announcement from China “a body blow to thousands of farmers and ranchers who are already struggling to get by.” Tariffs imposed by China on U.S. soybean exports have cut exports of the most valuable U.S. crop and forced Trump’s administration to compensate farmers for two years with combined spending of as much as $28 billion. China imported $9.1 billion of U.S. farm produce in 2018 - mainly soybeans, dairy, sorghum and pork - down from $19.5 billion in 2017, according to the American Farm Bureau.
“The relevant debate for investors now is whether the Fed can offset the negative feedback loop in corporate confidence,” Morgan Stanley strategist, Michael Zezas said. “Our economists don’t think investors should depend on it. More tariffs should drag on corporate confidence, capex, and global growth in the near term. Incoming purchasing managers indicator (PMI) data suggest that corporate sentiment remained weak in July and that weakness in manufacturing activity has extended likely into 3Q19.”