Traditionally, the third Friday in August is as dormant as they come. In the U.S., law and policymakers, business and financial potentates, and the self-styled media elite are into their mid-August to post-Labor Day summer breaks. Many Europeans, meanwhile, are off for the entire month. Financial markets activity slows to a crawl, save for the outlier event or events that can cause violent price swings due to thin trading volumes.
Tradition was turned on its head yesterday. Americans awoke to the news that China would impose tariffs, effective Dec. 15, on $75 billion in American-made goods. The moves reinstate 25% tariffs on autos, and target more than 5,000 products including soybeans, coffee, whiskey, seafood and crude oil. China had said it would respond to the U.S. imposing levies on $300 billion of Chinese-made products.
President Trump then followed with a series of tweets declaring the U.S. would be better off not doing business with China, ordering American companies to leave China, calling Federal Reserve Chairman Jerome H. Powell an enemy of the state for failing to lower interest rates far and fast enough for his liking, and directing package delivery companies to search for and refuse all shipments containing the deadly synthetic opioid, Fentanyl, paying special attention to orders from China, where it is believed a large chunk of the drug for U.S. consumption comes from. FedEx Corp., (NYSE:FDX); UPS Inc. (NYSE:UPS); and the U.S. Postal Service (USPS) have said they have robust anti-trafficking security programs already in place.
Trump delivered the coup de grace after the market closed, ordering an increase in tariffs on $550 billion of Chinese imports, equal to the value of all of China’s goods entering the U.S. each year. Effective Oct. 1, 25% tariffs on $250 billion in Chinese imports will be hiked to 30%. On Sept. 1, 10% tariffs on an additional $300 billion of goods will be raised to 15%. A separate 10% levy on imports of goods that would be typically purchased during the holiday season has been delayed until Dec. 15, in what administration officials have called a Christmas gift to American consumers. At that time, those tariffs will be raised as well.
The Office of the U.S. Trade Representative (USTR) has invited comments on the White House’s directive, but it is unlikely that any input will alter the outcome. In its statement, USTR called China’s action “unjustified” but did not elaborate. Various experts said Beijing’s move could have been expected and was relatively modest in dollar terms. In one of his tweets, Trump said the Chinese move was politically motivated.
The nerve-jangling day sent financial markets tumbling. In the U.S., where news of China’s move hit the wires around the start of trading, the Standard & Poor’s 500 dropped 2.6 percent. The I.T.-laden NASDAQ, led by Apple Inc. (NASDAQ:AAPL) which generates about 20% of its annual revenue in China, fell more than 3%. Apple shares declined 4.6% on the day.
It is unclear if, or to what extent, the market fluctuations were exaggerated by the normally light seasonal activity. Yet no one doubts that the risk, uncertainty and lack of clarity surrounding the tete-a-tete is taking its toll on business confidence, and was reflected in yesterday’s declines. The only seemingly clear view is that the game of chicken continues to escalate, and that the latest hikes will affect not just I.T. imports and components normally not transparent to the American consumer, but products that Americans see and buy every day.
Craig Menear, CEO of home improvement giant Home Depot, Inc.,(NYSE:HD) told analysts earlier this week that the tariffs on Chinese goods would have a “cost impact” on the company of $2 billion on U.S. sales. Those costs might be mitigated by suppliers shifting some of their production outside of China, Menear said. “I’m not aware of a single supplier who was not moving some form of manufacturing outside of China,” said Ted Decker, Home Depot’s executive vice president of merchandising. “So we have suppliers moving production to Taiwan to Vietnam to Thailand, Indonesia, and even back into the United States.”
It is also unclear whether the latest tariff action, and threats of more to come, will trigger an inventory pull-forward effect leading into the holidays. The last big push came at the end of 2018 ahead of what was expected to be a Jan. 1, 2019 deadline for U.S. tariffs on Chinese imports to go into effect. That deadline was subsequently pulled off the table, but not before a deluge of Chinese product was either in transit, was entering U.S. commerce or was already here.
Walter Kemmsies, who heads the ports, airports and infrastructure practice at real estate and logistics services giant JLL Inc. (NYSE:JLL) said the bloat from those orders is still being worked off. Based on Kemmsies’ channel checks, carriers are busy hauling outbound freight from warehouses and distribution centers, but are not doing all that much shipping of inbound goods into DCs due to already-full locations. The ratio of inventories to sales, as measured by the U.S. Census Bureau, has stayed elevated all year, but that is not a function of weak end demand, Kemmsies said. As stored goods continue to get moved out, inbound orders should pick up, he said.
Phil Levy, chief economist for logistics technology provider Flexport, said in a blog post Friday that the already-long odds of a U.S.-China deal being consummated have fallen further. “It is unlikely that U.S.-China trade talks scheduled for next month will be anything more than low-level perfunctory discussions, if they take place at all,” Levy said. “More likely is that China will now wait for the November 2020 election before seriously attempting to resolve the conflict.”
The question, according to Levy, is whether Trump, will continue to push up tariffs on what are classified as section 4a and 4b imports, a good portion of which are consumer goods.
There was no shortage of trade groups expressing outrage at Trump’s latest tariff move, with the common question being asked: “When will this all end.” Cooler heads are hoping reason will prevail. In an op-ed earlier this week in The Washington Post, FedEx Chairman and CEO Frederick W. Smith, William Brock, U.S. trade representative in the Reagan administration and Charlene Barshefsky, who held the same post in the Clinton administration, said Trump fails to tell Americans that, according to World Bank data, trade accounts for more than 27 percent of U.S. economic output and supports 1 in 5 U.S. jobs.
The nation’s answer to China’s “mercantilist” behavior and “state-directed capitalism” should be a robust policy of competition, not containment, they wrote.
(The version corrects an error on the value of Chinese imports subject to the respective tariff increases)