“Well, you must be from the city; ‘Cause you sure ain’t from round here; There ain’t no smoke free section… We don’t sell no import beer.” - “When in Rome” as performed by Travis Tritt
The U.S. trade deficit with China reached an all-time high of $419 billion last year. That’s a little less than half of our overall $891 billion total trade deficit.
In an effort to reduce the trade deficit, last September we imposed tariffs on hundreds of billions of dollars of Chinese merchandise and certain imports from other countries as well. China and other trade partners like Mexico and the EU responded by laying tariffs on a smaller but still significant amount of U.S. products. We briefly considered escalating tariffs but action was delayed as negotiations proceeded.
Some domestic industries have been damaged more than others by our new tariff policy. Farmers, for instance, are hurting badly as a result of freshly imposed retaliatory tariffs. As Iowa Senator Chuck Grassley wrote recently in the Wall Street Journal: “Mexican tariffs on U.S. pork…have lowered the value of live hogs by $12 an animal. Iowa is the top pork-producing state in the country. That means jobs, wages and communities are hurt every day these tariffs continue….”
Citizens in both the U.S. and China are paying more for imported goods because of the tariffs imposed by both countries. So which country stands to lose the most if negotiations stall? Probably China, as their economy is more export-heavy. But both China and the U.S. will suffer until an equitable resolution is reached. Economists are divided on how much a trade deficit actually hurts our economy. Trade deficits are not all bad; folks around the world send us cars, clothes and computers and we send them paper dollars (which we can print more of).
The effectiveness of our new tariff policy has been undercut somewhat by the administration's tax legislation and more government spending. (When our government spends more money, it effectively raises the trade deficit and simultaneously reduces the national savings rate. Some of the deficit is financed by the rising amount Americans borrow from foreign countries). If a trade war commences during a period of economic growth, like we are currently experiencing, Americans with more discretionary income may offset the effectiveness of our tariffs by buying foreign products anyway. In addition, because of the strength of the dollar, current imports into the U.S. are costing less and U.S. goods shipped abroad are costing more to our foreign buyers.
So while our tariff policy is hurting both the Chinese and the American economies, currently the situation is not spooking investors. Of course, if the economy falters, that can change rapidly.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.