Experts have been surveying the scattergun effects and responses to the new tariffs with a mix of fury and genuine worry. Most of the focus, understandably, has been on the big hits to global stock market assets, notably the Dow, which took a 750 point hit a few days ago. This may seem a bit high-end as a basis for people who don’t own stocks to worry about, but the real costs go from the top to the bottom of the global economy, particularly in the US.
Issues, real and imaginary
The nationalism and good guy/ bad guy nature of the rhetoric is largely irrelevant. There are serious issues with China, like the cyberwar which has been raging for years, espionage, territorial claims, Taiwan, Chinese capital roaming the world and getting business from the US, etc. What’s interesting about the tariffs in relation to these very real issues is that they can have absolutely no direct impact on the Chinese, at almost every level.
To explain:
• The Chinese don’t pay the tariffs. Importers and consumers pay them, directly and indirectly. American companies have enormous amounts of their products produced in China, so the tariffs actually look self-defeating in that regard.
• The biggest issue is exactly what impact the tariffs will have on the Chinese bottom line, and that’s not at all clear. China is well known for its strict management of margins on everything it produces, and it’s unlikely that the tariffs will change that very fundamental approach.
• One of the oldest crocks in the stock market is “The Chinese manufacturing index (orders for goods) is falling”. For at least the last seven years, that phrase has been used to excuse every market downward move, and so far, it’s been wrong every time. It invariably gives a better result than these reports/financial gossip suggest. Not much has changed since the tariffs were introduced.
On observed results so far, China has not taken any sort of significant hit which would impact its economy. The US business sector and the public, on the other hand, are now paying big extra money for American-owned products.
How the stock market hits affect your pocket
The stock market hits are instantaneous on private wealth. Your assets, either the stocks you hold or through investments like 401Ks, instantly devalue. That’s real money, not paper money, being lost. Your investment base is devalued, so your future returns are devalued until they climb out of the hole the devaluations caused, costing you more money.
The GFC of 2008-9 was said to “wipe out the American middle class”, and that’s how the stock market did that. It also trashed the real estate market, doing as much or more damage to private assets.
This definitely isn’t the same ball game in terms of the causes, but the results could be very similar. The GFC analogy holds good in one particular respect. Markets panic much more dramatically than ever before. Real wipeouts can be major permanent damage to businesses and individuals. A major global crash would be like an asteroid strike, and the damage incalculable.
The bizarre culture of the finance sector doesn’t help much, either. The finance sector is famous for its dismissal of the Main Street economy and total indifference to the “hard economy”, that is, businesses, investors aka munchkins, and grotesque views.
Goldman Sachs, for god only knows what reason, published a sort of edict that “curing people is bad for business”, for example. The sheer scale and number of criminal and other charges against the finance sector would fill an encyclopedia on a regular monthly basis. This is the sort of leadership, or lack of it, which will bear the load of a major global equity disaster.
The hazy politics of tariffs
It is strange to think that the US, of all nations, a nation literally built on trade, would take such a backward step as imposing these tariffs on its own businesses. This is basically a tax, which some genius will no doubt say makes up for the massive tax cuts for the rich in revenue, but it doesn’t and can’t.
The supposedly tax-averse Republican perspective must be quite a maze of compromises and equivocations by now. The tariffs add costs across the board to the simple act of doing business. The theory that someone else can deliver the sheer volumes of goods produced by China is absurd. Even more absurd is the idea that the US can just suddenly retool every sector and start producing these goods themselves. It’d take decades, and would probably be far more expensive than the imports.
Meanwhile, back on the Blunderosa, China is happily devaluing its currency, having been given an unarguable case for doing so by the US. The US and China had a currency bandwidth in place, which has also gone out the window, thanks to the tariffs. The Chinese are under no obligation, not even a theoretical obligation, to play ball with currency niceties.
So they can make their goods cheaper by devaluing, more competitive, and actually benefit from the currency position without having to do a damn thing about the tariffs. Bear in mind that when you’re talking trillions of dollars’ worth of trade values, they’ve won that round rather convincingly.
This war is being waged over every product, every iPhone, every PC, every gadget, fish, mushrooms, toasters, and the rest of the domestic inventory. Who’s winning, you ask? Well, you can be sure of one thing -It sure as hell won’t be you, your pocket, or your bank balance.
