Trade And Tariffs – Implications for the Fed

Trade tensions have been steadily escalating since the start of the year, culminating in the latest round of tariffs on $200bn of imports from China.

Downside Risks for Growth

In terms of economic activity, there are negative implications for both sentiment and spending with supply chain disruption, higher costs and uncertainty on the economic implications risking a slowdown in both investment and labour hiring.

The key issue for US growth is that this isn’t the only headwind. While the US booms for now, the outlook for 2019 and 2020 is looking more challenging with a fading fiscal stimulus, higher interest rates, a strong dollar and fears of emerging market contagion further depressing global activity. As such we expect to see US GDP growth slow from around 3% in 2018 to closer to 2% in 2019 and 2020 – just when President Trump seeks re-election. 

US officials counter that the fact the latest round of tariffs is starting at 10% and won’t be raised to 25% until next year – and that second part will only be implemented if China fails to make acceptable concessions – means that US businesses have time to make changes and bring production back to America.

However, this in itself disrupts business activity while US companies will also face higher tariffs on their exports to China. Indeed, China shows no willingness to back down at this stage and instead is using domestic fiscal and monetary policy plus a weaker yuan to try and offset the protectionism impact on exports.

Upside Threat for Inflation

Looking at the price of washing machines we can clearly see the impact. Solar panel prices have also risen and we are likely to see inflation in other components rise. However, the impact on the headline rate of inflation has been small so far given that, for example, washing machines only account for 0.05 percentage points of the CPI basket of goods and services.

As for inflation, we are already starting to see rising price pressures from tariffs. If you remember, the starting point was in January with “safeguard tariffs” of 30-50% introduced for washing machines and solar panels.

This was then expanded to 25% tariffs on steel and 10% on aluminium and then on 6 July President Trump announced a 25% tariff on China imports worth $50bn. –  Neal Bhai Reports

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Neal Bhai has been involved in the Bullion and Metals markets since 1998 – he has experience in many areas of the market from researching to trading and has worked in Delhi, India. Mobile No. - 9899900589 and 9582247600

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