Money Advice

Trade ‘spat’ now a full-blown trade war

Posted by The Simply Money Advisors Team on Sep 24, 2018 10:15:57 AM

President Trump decided last week to impose tariffs (taxes) on $200 billion of Chinese goods, which is on top of tariffs already in place on $50 billion of goods.

These new tariffs will see a tariff rate of 10% and will go into effect on Monday, September 24th. The tariff rate will increase to 25% on January 1st, 2019 if a trade deal isn’t reached.

As a result, China responded with additional tariffs on $60 billion of U.S. goods. The tariff rate for these goods will be between 5-10%. Like the U.S., China has already imposed tariffs on $50 billion of U.S. goods.

China also canceled high-level trade talks this week. They seem to believe negotiations are fruitless until after the midterm elections.

Many find it perplexing that the trade war with China has not negatively affected the stock market. At Simply Money Advisors, we believe the reason for this is that corporate profits haven’t been impacted.

If expected future earnings do start to decline, then stocks could feel some pressure. It’s unlikely corporate sales are significantly impacted from tariffs because we don’t sell that much to China. However, companies could see higher expenses, which would have hurt bottom line earnings.

The Federal Reserve, our nation’s central bank, will take center stage this week. The question is not if the Federal Reserve (Fed) will hike short-term interest rates (they will), it is whether the Fed leaves the door open to not hike again in December.

We will get a better idea of the Fed’s intentions from their quarterly economic projections and from Fed Chair Jerome Powell’s press conference following the Fed’s decision on Wednesday, September 26th. According to Bloomberg, the market is already pricing in about a 77% chance of another hike in December.

The Fed may want to leave the door open to keeping rates unchanged due to the uncertainties surrounding trade. Investors will also be watching a heavy economic calendar this week, which includes new home sales, reports on manufacturing, an update to second quarter GDP (Gross Domestic Product), personal income, personal spending, and inflation.

The Simply Money Point

The trade war could last for quite some time. President Trump could demand a lot to remove the tariffs, such as easy access for U.S. companies to sell in China, steps to reduce the trade gap, and the ceasing of stealing the U.S.’ intellectual property (e.g. technology secrets).

President Trump may be okay with letting the tariffs continue because this trade cloud overhanging China slows them down from becoming a more dominant global superpower and it forces U.S. companies and the U.S. economy to be less reliant on China.

Topics: Economics

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