Moody’s chimes in.
The trade war talk has been going on since the presidential campaign but markets just brushed it off and rallied. In 2018, the trade war verbiage moved to the foreground. But until June 14, the administration vacillated between thinking about tariffs and putting the trade war “on hold,” depending on who was doing the talking or tweeting.
This vacillation ended on June 14 (Thursday) evening, when it was reported that Trump had approved to hit an initial list of $50 billion in goods (1,300 products) from China with tariffs of 25%. At the time, the administration was also preparing a second list of products, accounting for another $100 billion in imports from China.
On the evening of June 19 (Monday), Trump threatened to hit another $200 billion of imports from China with tariffs of 10%. And on Tuesday, the Shanghai stock market plunged. Markets were taking it seriously.
Since then, Corporate America’s propaganda machine – the same that for the past two decades had extolled the unrivalled virtues of offshoring production to cheap countries – fired up the mainstream media, which launched into incessant, deafening, repetitive, and manipulative coverage of how these tariffs would hurt US jobs more than anything.
Two glorious examples are Harley-Davidson and GM, which had been laying off workers and shutting plants in the US for years as they were offshoring production to cheap countries. For example, in July 2017, Harley-Davidson announced layoffs in the US as it was building a factory in Thailand. GM has been laying off workers in the US since 2016, even as it opted to produce more models in Mexico
Now they had a fig leaf – the threat of future tariffs – behind which to hide their long-planned offshoring strategies. You couldn’t get on the internet or turn on the radio without being bombarded by how it was tariffs that were driving these noble companies, which had been offshoring production for years, to offshore more of their production.
But beyond the propaganda of Corporate America whose margins would be squeezed by tariffs and who’d have to invest in the US to rejigger their supply chains back to the US, how did markets see it?
Chief Economist at Moody’s Capital Markets Research, John Lonski, had the good idea to check on it, and found in his current “Credit Markets Review and Outlook” that markets had distinctly different ideas. The two key time periods for his analysis are the stock market results for the period since the close of June 14, and for the year so far, through July 12. And this is what he found:
In the US, the stock market, as measured by the total market Wilshire Index, “defied the expectations of many.” Despite the red-hot Trade War rhetoric, the Wilshire Index has risen 0.5% since the close of June 14 and is up 5.3% year-to-date. The S&P 500 is up 4.7% year-to-date.
But the stock markets of countries that have large trade surpluses with the US – and that “have the most to lose from a protracted trade war,” as Lonski put it – have been getting battered. For example:
- China’s Shanghai Composite: -6.8% since June 14, -14.2% YTD
- Korea’s KOSPI: -5.7% since June 14, -6.8% YTD
- Germany’s DAX: -4.7% since June 14, -3.3% YTD
- Japan’s Nikkei -2.4% since June 15, -2.5% YTD
The reasons that Moody’s cited as being behind the markets’ moves – up in the US, down in the big-trade-surplus countries – are the obvious ones that the markets have been seeing from day one but that the US media are totally and willfully blind to:
- The US is less dependent on exports than these countries in terms of overall business activity.
- The US has a huge trade deficit with these countries, and thus imports far more from them than it exports to them, and any retaliation by those countries would by definition hit those countries far harder than the US.
- The US economy is currently strong, and now “well outperforms other major economies.”
“Nevertheless, though the US is better able the withstand the direct and collateral damage of a trade conflict, it is still expected suffer casualties in a trade war,” Lonski says.
This is very true. There will be winners and losers. And missteps could lead to some broader economic consequences in the US and globally. But not doing anything would allow the continuation of a trade war that has been waged against US workers for over two decades, largely by Corporate America’s own ambitions to offshore production, profits, and cash.
Tariffs are similar to “sin taxes,” such as on cigarettes and alcohol. They encourage healthier behavior that is less costly for society. Tariffs will give Corporate America a financial incentive to bring some production back to the US in order to avoid the margin squeeze that tariffs represent. While this strategy will not bring back the old jobs from the 1970s – they have been obviated by automation – it will create high-value jobs in the US and whittle down the huge and unsustainable trade deficits that US has with the rest of the world.
So we go beyond the hysteria about auto tariffmageddon. Read… After decades of relentless offshoring, the equation may change for automakers and component makers.
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