Market Views

(Trade) War, What is it Good For?


By Joe Zidle, Chief Investment Strategist
with Taylor Becker, Research Analyst

This past week’s escalation of the trade war with China brings to mind an old Seinfeld episode. Elaine is in the back of a limo with her boss, Mr. Lippman, and grouchy Russian writer Yuri Testikov. Struggling to add to a discussion about Leo Tolstoy’s famous War and Peace, Elaine mistakenly offers whether “War and Peace would have been as highly acclaimed as it was had it been published under its original title, War, What Is It Good For?” Some may ask the same about this increasingly testy tariff spat.

Costs on US consumers mount Tariffs haven’t hurt US economic prospects much thus far, as evidenced by the 3.2% GDP growth rate in Q1’19. But it has taken a toll on US consumers, according to a recent white paper from the Centre of Economic Policy Research.1 The paper estimates an aggregate $1.4 billion reduction in spending per month due to cost pass-through, a lack of other available varieties and supply chain disruptions to affected companies.

Job growth promises fail to materialize The steel and aluminum industries are a case in point. A 25% tariff on steel and a 10% tariff on aluminum were supposed to bring employment back to the US.2 But in a little over a year, only 4,700 new steel and aluminum production jobs have been created.3 The median annual pay for ironworkers and sheet metal workers is $53K and $48K per year, respectively.4 But estimates of the direct cost of these tariffs range from $5.6B to $7.5B, implying that consumers paid $1.2M-$1.6M per job created.5 National security concerns notwithstanding, that’s a heavy price tag for a “Made in America” sticker.

It’s not just the isotopes anymore The next round of tariffs goes beyond intermediate and industrial goods. The average person could be forgiven for never knowing which items were affected by last year’s tariffs. After all, how many of us import nuclear reactors or machinery for isotopic separation? A range of consumer-facing products, from baseball gloves and backpacks to luggage and furniture, are now subjected to tariffs. Also at risk is a tax on all Chinese imported goods, including mobile phones—a tariff that most Americans would certainly notice.

A paradox to worry about In our Q1 survey, seventy percent of our portfolio company CEOs indicated support for the US administration’s get-tough stance on China trade.6 They are right that real benefits would arise as a result of greater access to China. In particular, intellectual property protection and the lifting of restrictions on foreign ownership of domestic companies are key to ensuring a freer, more-open Chinese market. Despite these potential benefits, data from the semi-annual ISM Survey of Manufacturers show capex and other business investment being shelved because of concerns about the economic prospects of the US and China.7

Confidence equals growth CEO confidence is closely tied to GDP growth. As confidence goes, so goes the economy. With the current snag in negotiations, a prolonged trade war may delay investment plans, slow growth and increase prices. As a result, some estimates show economic growth in the US could be reduced by roughly 50bp over the next 12 months.8 At the same time, corporate profits will be at risk from escalating input costs. Reaching a deal in the short-term is in the interests of both sides; China needs it economically, and President Trump needs it politically. But until an agreement is reached, markets are unlikely to make any meaningful gains.

1. Source: Centre for Economic Policy Research, as of March 2, 2019.

2. Note: On March 23, 2018 the US imposed a 25 percent tariff on all steel imports and a 10 percent tariff on all aluminum imports, with exceptions for specific countries.

3. Source: Bloomberg, as of May 6, 2019.

4. Source: Bureau of Labor Statistics, as of May 2018.

5. Source: Peterson Institute for International Economics ($5.6B estimate), as of December 20, 2018. American Action Forum ($7.5B estimate), as of May 31, 2018.

6. Note: Represents a subset of Blackstone’s Corporate Private Equity portfolio company CEOs.

7. Source: Institute for Supply Management (ISM), as of May 1, 2019.
8. Source: Strategas Research Partners, as of May 13, 2019.


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