Key Points

  • Leaving politics out of it, if that’s possible, let’s dive into the economic implications of the trade war and tariffs; currently and prospectively.

  • The United States has been bearing the brunt of the trade war’s economic impact to date.

  • Escalation and implementation of the third phase of tariffs would hit consumer goods, and likely inflation, to a more significant degree than the first two phases.

Although we’ve put out short notes to our clients over the past few months about the United States-China trade war and tariffs’ impact on the economy, it’s been a while since I penned a more comprehensive (read: longer) report. We always do our best to stay out of the morass of partisan politics, and trade tends to find its way into that morass; but our job is to be objective about the economic consequences.

Tweets aren’t guarantees

Hope had become elevated alongside the U.S. stock market’s rally off last year’s December lows that a trade deal was a done deal. We were more skeptical than the consensus—not because of any particularly unique knowledge about what was happening behind the scenes, but because there were few concrete indications, other than the market’s rally and a few tweets, that a deal was all-but-inked.

Although the U.S. stock market had already rolled over from its recent peak, the early-May announcement that the latest round of tariffs on $200 billion of Chinese goods were going to be raised from 10% to 25% exacerbated the sell off and raised volatility. That announcement and China’s promise to retaliate with more tariffs on U.S. goods exported to China dented investor sentiment and the market, unleashing a pullback of more than 5% in the S&P 500 and the Dow Jones Industrial Average and more than 6% for the NASDAQ.

Last week brought some relatively better news with the Trump administration announcing it was delaying by six months the threatened imposition of auto and auto parts tariffs, which would have widened the trade war to include the European Union and Japan. In addition, tariff discussions in North America associated with the formerly-NAFTA/now-USMCA deal suggest the likelihood of Congressional ratification has increased. These newsworthy events, as well as some better news on housing and Walmart’s earnings’ beat, helped lift stocks last week.

However, later in the week it was offset by the Trump administration moving to make it more difficult for U.S. companies to do business with Huawei, one of China’s largest telecommunications companies. In response, Chinese Commerce Ministry spokesman Gao Feng said Thursday, according to state-run news agency Xinhau, that the United States is exhibiting “bullying behavior” and that it is “regrettable that the U.S. side unilaterally escalated trade disputes, which resulted in severe negotiating setbacks.” So, the battle rages on.