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By Guest Blogger Ryan Lewenza
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It’s been a little over a month since Trump’s “Liberation day”, where he announced massive tariffs on China and other nations, and Trump is now doing a major reversal by slashing these tariff rates on Chinese goods for the next 90 days.
On April 2nd President Trump announced an additional 34% tariff on Chinese goods. China then responded with similar retaliatory tariffs, and Trump, never to be bullied around, countered by increasing the tariff rate to a whopping 145%. Surprising Trump and his administration, China countered again by raising their tariff rate on US imports to 125%.
Ladies and gentlemen, we got ourselves a full-blown trade war between the two largest and most powerful nations in the world. Clearly, tariff rates at these levels would wipe out almost all trade between the two nations, which as, US Treasury Secretary, Scott Bassett stated, is effectively a “trade embargo”.
Cargo shipments coming from China into US ports are plunging with scheduled vessels coming into the Port of Los Angeles (accounts for 40% of all containerized cargo entering the US) down 40% on a week-over-week and year-over-year basis. This has led to concerns over the negative economic impact of these tariffs and that the US could start seeing shortages in some products.
Just imagine how irate some US consumers will get over not being able to purchase and set off fireworks on the 4th of July or not being able to put up new lights at Christmas time!
Scheduled vessels coming into the Port of Los Angeles are down over 40%
Source: Wabtac Corporation, Port of Los Angeles. Week of May 25-31
In China, exports account for 20% of their economy and with their housing market in the dumps, China was in an economic bind and needed to find an off ramp fast. So, over the weekend, Scott Bassett and the US trade team met with Chinese trade officials to see if they could find a deal and de-escalate the situation. Apparently, it was a very productive meeting with both countries agreeing to lowering their tariffs over the next 90 days, giving them time to work out a detailed trade agreement.
The US is lowering its tariff rate from 145% to 30% on most goods (10% base tariff and 20% existing fentanyl tariffs), while China will lower its tariff rate from 125% to 10% for the next 90 days. So, we have a major de-escalation of the tariff war, and we could be through the worst of this period.
Markets reacted very positively to this announcement as it was viewed as a best-case scenario. Going into these discussions and the US officials saying these are just talks to begin future talks, few were expecting any major announcements or breakthrough. But this isn’t the end. Now the hard work really begins as they work through the details of a future trade agreement.
The US wants China to purchase more US goods, to reduce the large trade deficit which was US$295 billion last year, and they want China to open up their markets so US companies can do more business there. If they cannot reach a deal over the next 90 days, then we could see tariffs ratchet back up.
It’s important to note that with this lowering of the tariff rate that the effective tariff rate for Chinese goods is still at 33%, which is the highest of any country. According to a recent Yale Budget Lab report, the total US average effective tariff rate is at 17.8% (this is after the lowering of China and other tariff rates), which marks the highest tariff rate since 1934.
This rate is still very high and will likely add to inflationary pressures in the coming months, which is a concern and something we’ll be monitoring very closely.
US average effective tariff rate since 1790
Source: the budget lab
So, this is a big reversal from Trump and a de-escalation, which we view as a big positive for the economy and markets. But we’re not out of the woods yet and the next 90 days will be critical to see if the US can get a workable and enduring long-term deal with China. Stay tuned.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.