As we are in the in the second quarter of fiscal 2019, we have been living with President Donald Trump’s tariffs for a little longer than a year now.
With President Trump’s “America First” policies, he has had his mind set on pushing American products and businesses before foreign products, mainly Chinese based. We have seen massive economic growth under his presidency and much needed expansion, but how much longer can that last? Could his policies eventually cause damage to the economy? As of right now, it has had a positive effect in the short-term, but what about the long-term? Is it sustainable? No one really knows until something does happen, but we can make educated assumptions.
As a year has passed by, we can see now that President Donald Trump has taken action in numerous aspects of the economy. He has made massive tax cuts for almost everyone, implemented an “America First” policy, and increased tariffs on Chinese products. However, with the newly implemented tariffs, could the extra tax either fall onto the consumer or the business? Yes, with these heavy tariffs, it can create a problem for either consumers or the business due to the nature that American made products tend to be more costly than that of Chinese products, so when we raise the taxation on those foreign goods, it forces consumers to buy a more costly product. But surprisingly we have seen an increase in consumer purchases; which may be due to a tax relief leaving more money in consumers’ paychecks. These two side-effects of President Donald Trump’s actions may cancel each other out. And as we can see, The United State’s stock market slowed only by a sliver of a percent; after looking at Fiscal 2019’s first quarter, we had a very strong quarter which usually means another year for positive numbers. If we look at our first quarter we can see we were higher than the minimum number (historically) to not have a recession this year, “The S&P 500 is up 13% in the first quarter of 2019” which means “Every time the S&P 500 scored a gain of 10% or more in the first quarter of a year since 1935, the market managed to climb up 6% more on average for the rest of the year with positive performance during 11 of the 12 times”. Since our Fiscal Q1 was above 10%, chances are that the S&P 500 will climb another 6%. If we continue down this path, this expansion connected with the tariffs could be a good thing in the long run, but it would have to play out in a sequential order.
First off, China’s economy is slowing down and not expanding as rapidly, which gives the United States the upper hand in trade talks because China’s economy would not be able to withstand an export decrease. More than 18% of China’s Gross Domestic Product (GDP) is through exports, and China’s exports 18% to the United States. China cannot afford to lost a majority of its main export consumer. If China loses a decent portion of its GPR revenue paired with an already slowing economy, this situation could turn into a financial disaster for China.
Secondly, the United States economy must continue to grow until a deal is reached.
If not, the United States could lose its advantage in deals made, and in turn hurt both the United States and Chinese economy. If that happens it could potentially create a domino effect across the globe. With Brexit wrecking itself and Italy’s slowing economy, a combination would cause a world-wide recession. As of right now China and Italy are discussing trade routes (due to China trying to stimulate its economy) and if Brexit goes through, part of the deal is that the United Kingdom cannot trade with countries within the European Union, which in turn would cause Italy to collapse, and so on.
Thirdly, to my surprise, the United States has remained steady with our rate of inflation, remaining around 2.03% on average each year, which is in the aim of the Federal Reserve’s goal of inflation. As of right now, the enacted tariffs have not affected the United States inflation rate, but if our economy makes a down-turn towards a recession, then there is a possibility that inflation could occur, but only if the aggregate demand of products and services greatly increase above the economy’s production and capacity, which is why it is crucial that we come to a deal because if we wait too long and go into a recession and tariffs tacked on, the inflation will go through the roof if the United States cannot produce enough, fast enough, for cheap enough. “In January 2018, Trump imposed tariffs on solar panels and washing machines of 30 to 50 percent. Later the same year he imposed tariffs on steel (25%) and aluminum (10%) from most countries. On June 1, 2018, this was extended on the European Union, Canada, and Mexico. The only countries which remain exempted from the steel and aluminum tariffs are Australia and Argentina. Separately, on July 6, the Trump administration set a tariff of 25% on 818 categories of goods imported from China worth $50 billion” (Wikipedia). After all of these options of tariffs, President Donald Trump is “hard-balling” the rest of the countries into lowering prices, and after him watching attempt to strong-arm everyone else, I believe he is betting on our economy outperforming the major competitors such as Russia, China, India, Canada, and Mexico. If the United States can hold its own for a year or two more, it will most likely give countries an inclination to lowering their export prices to the United States. These actions are showing the rest of the world that the United States is capable of supplying enough to cover those listed tariffs to not create excess inflation without the help of foreign countries.
Recently, as of Wednesday, May 5th, the Federal Reserve announced that they would not be raising rates and that the United States economy is not showing any signs of overheating. In an interview, Federal Reserve Chair Jerome powell told us that “we don’t see any evidence at all of overheating,” (Powell) responding to questions asked by Yahoo Finance regarding any correlation between an overheated economy and stronger GDP numbers. According to Yahoo Finance; who interviewed Jerome Powell, stated that “the Fed opted to hold rates steady at its target range of 2.25% to 2.5%, highlighting inflation is “running below” its target. The Fed, however, noted that economic activity ‘rose at a solid rate’ during the first quarter” (Cheung). This is great news as that if the United States is still growing at a steady rate, it shows no sign that the economy is about to pop, which allows us to conclude that the tariffs are having no major negative effects on consumer habits, as of right now. But again, it goes back to my previous statement, how long can the United States economy last, paying higher prices before people stop paying? What happens from there?
Well we might have an answer by next Friday the 10th. There are talks about a trade deal taking place for next Friday with President Trump and Chinese Vice Premier Liu He, who might come to Washington May 10th, and discuss a trade deal. United States and China are the biggest economies in the world, and for some years now having been competing and arguments about many large topics regarding intellectual property rights and to have China buying more American products. But if the deal goes sideways, it could cause the United States’s economy to fall as many investors are having a sense of malaise and have been watching the trade deal very closely (Pramuk). If this does happen, most investors will most likely sell their shares to make their portfolio liquid, resulting in the less demand for paper assets causing the price to fall. Our economy is in such a sensitive place right now that a bad deal can turn a small crack into a crater. With amplified pressures from everyone, next Friday will be a day watched closely by everyone, waiting to see what to do.
Another point giving the United States the upper hand is that the dollar is much stronger compared to the Chinese Yuan. 673% stronger to be more specific. This is a major reason as to why the tariffs are not affecting American consumers as much as people believed it would. Because even if there is a tax raised on foreign goods, with such a strong dollar, it allows the people to not be affected as much, due to the fact that the consumer can purchase foreign goods without it taking a toll on consumers wallets. That being said, if a deal is not met soon, it raises the question as to how much longer can American consumers afford higher prices? Probably only a year or two potentially. But again it also raises another question, if American consumers are buying American products made by American companies who employ the same consumers, can this potentially prolong the strong economy that we are in. Maybe, if American companies continue to raise wages and/or cut prices of products, sure. We can prolong the next recession for another three to four years. But it depends if these companies give back enough to their employees. And if so, that would mean the tariffs worked, allowing America to shrink the trade deficit.
Throughout President Donald Trump’s campaign, closing the trade deficit, which at the time was a little under one trillion dollars, and making good on his promise of at least attempting. And as of right now I feel that we are in a better position to negotiate with China given the listed reasons above. If the United States could get a deal on May 10th, and we lower tariffs on foreign countries, it should allow our GDP to expand more and be less restricted if intellectual property rights is part of the deal. China has a stigma of stealing ideas and producing them for cheaper, which hurts the originator of the idea or product. So the main goal is to stop actions such as those from happening. Rather than walk in with a bravado or false image, both sides want to get to a deal at this point.
To add to this, the unemployment rate is particularly low last recorded month (March) only with a 3.8% unemployment rate. As I said previously, when consumers started buying more American made products which companies could reinvest into employees and wages creating that money cycle mentioned before. But as we get to the point in the economy
where we cannot employ anymore workers and it just stagnates? Well that might also be another obstacle this administration has to take into consideration, yes it is extremely low, but what happens to the people who can no longer purchase American products because they do not have a source of income to purchase these products? Well they would buy cheaper foreign goods, but that will not matter because they will be around the same price if they are left to pay the extra tax on the product. Eventually, it will be lower to lower middle class who will be affected more than the rest, which will drag them down.
After looking at the information I researched, I have come to the personal conclusion that for the United States, these tariffs have actually been a great economic resurgence. I believe that with tensions running high, it’s a harbinger to the potential deal. These tariffs have been an incentive to purchase American products actually being manufactured in America, which as a result provides the economic capability to hire more employees who are also the consumers who put money into our economy, which then becomes a circular flow creating a self-sustaining economy. These tariffs are also protecting intellectual right so foreign nations cannot steal and duplicate ideas for cheaper. Personally I believe we should try to buy more American products, not necessarily have to pay more for the products, but find ways to compete with other nations in pricing and make them appealing to foreign consumers. For instance, America is exporting rice for the first time ever to China. We were able to convince China, the world’s largest rice supplier, to import rice to China, again going back to making American products more appealing.
My prediction for the future would be that if the United States and China can come to an agreement, America will loosen their tariffs and allow a more fluid trade, all while remaining strict on certain laid our policies. Once that goes into effect, we will demand a more balanced trade with the rest of the first world countries, which they would comply after seeing that we struck a deal with China. But if China and the United States do not reach a conclusion then a deal, I believe that investors will withdraw their money causing stocks to fall. America will slam China with more tariffs as a repercussion causing the Chinese Market to fall as well as European countries as a result of no deal being met. It would create a domino effect until most countries are going to be dealing with a recession, but I feel my first prediction is what is to come.
In overall conclusion, the tariffs have not had a negative effect on the United States’s economy since it has created jobs to stimulate the economy and revive our slower growth we had been experiencing. The current tariffs make the United States a larger player in global trade and making our products ostentatious within our own country. America is not looking for a take all deal, instead they are looking more for a quid pro quo deal in order to not hurt China but to help America. In the future I can imagine the trade deficit between the United States and China shrinking, and lowering the tariffs on most countries as well.