Most economists say we’re not in a trade war – yet.
An informal Washington Post survey over the weekend of 22 top economic forecasters found that most of them – two-thirds – say the United States isn't yet at the point of an actual trade war. While President Trump's actions are moving us closer to that label, the forecasters surveyed don’t think the effects of the president's tariffs on various countries are big enough yet to classify as a true trade war. Most economists surveyed would still dub the fighting a “skirmish.”
“I would call this a trade skirmish at this point rather than all-out war. If we stay with the military analogy, it is like lobbing some artillery shells and minor border incursions,” said Martin Barnes, chief economist at BCA Research. “A war would be when there is a full-scale invasion. In other words, when more countries and more goods and services are affected by tariffs and other protectionist actions.”
But Trump clearly isn’t done yet. On Monday evening as most of America was focused on separating migrant children from their parents at the border, Trump announced he was slapping a 10 percent tariff on another $200 billion of Chinese imports. The president said if China chooses to retaliate (as it has with past actions), he’ll follow up with tariffs on yet another $200 billion of Chinese goods. There’s no timeline for when these latest tariffs would go into effect, but Trump is clearly still hungry for more aggressive action when it comes to trade.
Before last night, Trump announced tariffs on about $95 billion worth of goods from foreign countries. It sounds like a big number, but in reality, it’s only 4.1 percent of U.S. imports. In the eyes of many economists, it's barely a blip, especially compared to the trade war of the 1930s where the Smoot-Hawley Act applied to nearly all imports. When asked about Trump’s tariffs impacting the U.S. economy, Federal Reserve Chair Jerome Powell said last week: “We really don’t see it in the numbers at all.”
If Trump does implement the threatened $200 billion in tariffs on Chinese goods, his trade "skirmish" would bring the total number of goods to which tariffs are being applied to about 10 percent of U.S. imports, a substantial escalation.
And the “skirmish” is already starting to feel very real for some U.S. companies. There have been nearly 21,000 applications to the Commerce Department for exclusions from Trump’s steel and aluminum tariffs, a reminder of how deep the impact already is in some parts of the economy. That figure is expected to climb even further, possibly doubling, now that close American allies like Canada and the European Union are subject to the tariffs as well.
Commerce is severely behind in reviewing applications and many Republican lawmakers have already written to the Trump administration to complain about how the delays and confusion are hurting business in their districts.
“Steel and aluminum tariffs are already doing serious harm to American businesses and workers, and this decision will only make matters worse,” said Rep. Jackie Walorski (R-Ind.), who represents a district with a lot of manufacturing. Her office found that one company has filed over 1,100 exclusion requests alone, and the average company has filed over three dozen.
Commerce has 90-days to review applications and is supposed to decide whether to grant an exclusion based on whether the steel or aluminum product can be sourced in the United States or not. The first decisions are expected next week, a test case for the Trump administration, especially Commerce Secretary Wilbur Ross, who ran a steel company.
Trump is also feeling the pressure from Congress over his leniency toward Chinese tech firm ZTE. On Monday night, the Senate passed a bipartisan amendment to the defense authorization bill that would reinstate a seven-year ban on any U.S. company selling parts to ZTE, a telecom company. The amendment passed by a vote of 85 to 10, a remarkable show of unity from lawmakers who think Trump’s deal with ZTE was a huge mistake.
After China complained the ban would put ZTE out of business, Trump tweeted his support for Chinese workers and then struck a deal with ZTE to impose a large fine and more monitoring of the company instead prohibiting the company from buying parts from U.S. companies. It remains in doubt whether the House would pass the Senate’s amendment, but it’s one more trade “skirmish” Trump is fighting.
There was lots of reaction to the Trump's threats on China in the Twitterverse:
I've been amazed at the complacency of markets as Trump marches off to trade war. We don't know that he'll go all the way, and break up the global economy. But surely there's a substantial chance. 50%? 30%? Surely that chance should be priced in https://t.co/T9wLEMeZb7— Paul Krugman (@paulkrugman) June 19, 2018
From the China correspondent for Bloomberg TV:
Trump threatening additional $400B China tariffs at 10%. On top of $50B at 25%. If enacted would cover almost all Chinese imports into US (total approx $500B in '17). #China can't match-only imported $150B from US. Beijing may target US co's China ops instead #tictocnews #trade— Tom Mackenzie (@TomMackenzieTV) June 19, 2018
From a former Obama deputy secretary of labor:
Trump is shocked that his tariffs on $50 billion of Chinese products are met with Chinese tariffs on $50 billion of U.S. products. Trump now ups the ante to $200 billion of tariffs and says he will keep going higher if China retaliates.— Chris Lu (@ChrisLu44) June 19, 2018
This is how trade wars start. https://t.co/ZneNAIvCgZ
From a Bloomberg Businessweek correspondent:
Programming note: Tory Newmyer is on vacation and this newsletter is publishing on an abbreviated schedule this week (today, Wednesday and Thursday). Tory will return next Monday with a full week of newsletters delivered to your inbox.
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— China's response. Bloomberg News's Jenny Leonard and Enda Curran: “The development drew an immediate rebuke from China, with the Ministry of Commerce in Beijing promising to retaliate with 'strong' counter measures. 'If the U.S. loses its sense and publishes such a list, China will have to take comprehensive quantitative and qualitative measures and retaliate forcefully,' according to a statement from the ministry.”
— Asian markets dip. "Stock markets across the region fell Tuesday, with Shanghai closing down 3.78 percent, its biggest drop in two years, and Shenzhen down 5.31 percent," Emily Rauhala reports. "Hong Kong’s Hang Seng Index (HSI) closed down 2.76 percent, while Japan’s Nikkei lost 1.77 percent and Korea’s Kospi Index was down 1.54 percent. Major European markets opened down across the board.
“'Asian countries that have close trade ties to China such as South Korea and Japan are bracing for side effects of the trade war,'” Park Jin-woo, a researcher at Seoul’s Center for Trade Studies at the Korea International Trade Association."
— Saudi oil exports increase. Bloomberg News's Brian Wingfield: “Saudi Arabia’s crude exports jumped in the first half of June, before the world’s largest oil exporter meets with other producer states to thrash out a collective production policy. Observed shipments from the country’s Persian Gulf and Red Sea ports averaged 7.388 million barrels a day during the first 15 days of June, compared with 7.145 million barrels a day in all of May, initial vessel-tracking and fixture data compiled by Bloomberg show. Were the current rate maintained, it would represent the highest observed monthly outflow since March 2017. The increase occurs as the Organization of Petroleum Exporting Countries prepares to meet in Vienna on June 22 to discuss whether to continue output cuts that began at the start of 2017. . . . Trump is pressuring OPEC to add barrels, claiming oil prices are too high.”
— Builders worry about lumber tariffs. The Associated Press: “The threat of a trade war with Canada has taken a toll on the confidence of U.S. homebuilders, according to index released Monday. The National Association of Home Builders/Wells Fargo builder sentiment index released Monday fell two points to 68 in June. A reading of 70 in May temporarily snapped a four-month slide. . . . 'Builders are optimistic about housing market conditions as consumer demand continues to grow,' said NAHB Chairman Randy Noel, 'However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.'”
— Canada is looking for solutions amid its trade tensions. Reuters's David Ljunggren: “Canada is considering all options, including providing financial aid to the auto industry, to cope up with possible U.S. tariffs, a senior federal minister said, even as officials expressed doubt Washington would follow through with a threat to impose the punitive measures. . . . Trump last month said he might impose tariffs of up to 25 percent on foreign-built automobiles, which could cause major economic damage to Canada and a heavily integrated North American industry. After Trump slapped tariffs on Canadian steel and aluminum on May 31, government ministers promised to support the sectors, and Innovation Minister Navdeep Bains told Reuters the same kind of aid could be ready for the auto industry. 'We’re examining all options . . . our view is that if any such action is taken, we’re going to support our workers,' he said in an interview last week. 'The message I would convey to the auto sector workers is - we have your backs.'”
— A Trump adviser says the United States can handle a trade dispute with China. Bloomberg News's Randy Woods: “Now is the right time to pressure China on its trade policies because the U.S. economy is strong enough to absorb uncertainty arising from bilateral tensions, White House Council of Economic Advisers Chairman Kevin Hassett said Monday. . . . 'When uncertainty is high, that’s difficult for Americans, and it does depress activity a little bit,' Hassett said in an interview on CNBC. 'If right in the middle of a financial crisis we added some uncertainty over exactly how are these negotiations going to work out, then it would be pretty harmful then. But right now the economy has got a lot of forward momentum.'”
— The Justice Department inspector general is probing Comey's memos. The Post's Matt Zapotosky, Demirjian and Devlin Barrett: “The Justice Department inspector general said Monday that his office is still probing possible misconduct in the FBI’s safeguarding of its own secrets — from how former director James B. Comey handled his private memos to whether others under him gave sensitive details to reporters. Inspector General Michael E. Horowitz revealed the continued investigative work to lawmakers on the Senate Judiciary Committee, which on Monday conducted the first hearing to examine his 500-page report assessing how the FBI handled the high-profile investigation into Hillary Clinton’s use of a private email server while she was secretary of state. . . . One of Horowitz’s most notable assertions was that his office, based on a referral from the FBI, was reviewing the handling of Comey’s memos detailing what the former FBI director viewed as troubling interactions with Trump. Horowitz said he planned to issue a report on the matter, as well as another one on leaks from the FBI.”
— Trump doubles down on separating migrant families. The Post's Philip Rucker, Josh Dawsey and Seung Min Kim: “The Trump administration’s move to separate immigrant families at the border and detain children apart from their parents spiraled into a humanitarian and political crisis Monday as the White House struggled to contain the growing public outcry. . . . The president asserted that the parents illegally crossing the U.S.-Mexico border with their children 'could be murderers and thieves and so much else,' echoing his incendiary remarks about immigrants at his campaign launch in 2015. And in a series of dark tweets, he warned that undocumented immigrants could increase gang crime and usher in cultural changes. 'The United States will not be a migrant camp, and it will not be a refugee holding facility,' Trump said in a midday speech. 'You look at what’s happening in Europe, you look at what’s happening in other places. We can’t allow that to happen to the United States. Not on my watch.'”
And criticizes Merkel's immigration policies. The Post's Griff Witte: “After days of high-wire negotiation with rebellious allies, German Chancellor Angela Merkel took to a podium in Berlin Monday to announce a compromise on migration that will hold her government back from the brink of collapse — at least for now. Minutes later, President Trump took to Twitter to implicitly cheer for her fall. 'The people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition,' Trump tweeted. 'Crime in Germany is way up. Big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture!'”
— Audi chief executive is arrested. The Post's Jonnelle Marte: "The chief executive of Audi, the luxury automaker owned by Volkswagen, was arrested Monday on suspicion of fraud in relation to the German carmaker’s emissions-cheating scandal. Rupert Stadler, 55, was detained a week after his home was searched and German prosecutors said he was a focus of their probe into any manipulation of Audi emissions controls. Stadler is the first member of Volkswagen’s executive board to be arrested in connection with the diesel emissions investigation. In 2015, Volkswagen was discovered to have been using software during emissions testing to manipulate results. Munich prosecutors said in a statement that Stadler was detained out of concern that he would suppress evidence needed for their investigation."
— Freight rates are going up. The Wall Street Journal's Erica E. Phillips and Jennifer Smith: “Retailers and manufacturers are taking stock of their transportation costs and exploring alternatives as a capacity crunch in freight is driving up prices and causing shipping delays. A variety of companies, including food producer Hormel Foods Corp. and retailer Dollar General Corp. , have reconfigured their supply chains, including building out their own truck fleets, reducing the frequency of pickups and deliveries, and shopping around for better rates. Freight rates have been climbing in recent months, making it harder and more costly for shippers to book transportation at a time of year when demand is typically lighter. U.S. trucking and rail-freight spending rose 17.3% in May compared with the same month in 2017, according to the Cass Information Systems Inc. index for freight expenditures.”
— The Supreme Court will look at Apple's App Store. The Post's Tony Romm: “The Supreme Court on Monday announced that it would consider a case that asks whether consumers can sue Apple over the way it manages millions of apps for iPhones and iPads, threatening to expose not only Apple but also its tech industry peers to new antitrust scrutiny. The new fight in front of the nine justices stems from a lawsuit initiated in California almost seven years ago. Robert Pepper and three other iPhone-owning plaintiffs allege that Apple has “monopolized” the market for iPhone apps because it has total control over the games, utilities and other offerings that appear in its App Store. Apple has vigorously opposed the lawsuit, and courts have split as to whether consumers are directly harmed by its App Store policies. After a recent loss, Apple appealed to the Supreme Court, which must address whether consumers have standing to bring such a case in the first place.”
— Spending cuts face long odds. The Hill's Jordain Carney: “Trump's plan to claw back billions of dollars in previously approved government spending is facing a likely death in the Senate as lawmakers eye a vote this week. Senators have until Friday if they want to pass the package to claw back roughly $15 billion in spending with only a simple majority that allows them to avoid a Democratic filibuster. The measure narrowly cleared the House last week. Supporters of the measure have no room for error if they want to get the bill to Trump’s desk. With GOP Sen. John McCain (Ariz.) absent as he battles brain cancer, potential Republican votes are capped at 50 — and no Democrats have indicated they’ll support the legislation.”
— Trump formally nominates Kraninger to lead CFPB. The Hill's Sylvan Lane: “Trump on Monday formally nominated White House budget official Kathy Kraninger to be director of the Consumer Financial Protection Bureau (CFPB). Kraninger, an associate director of the White House Office of Management and Budget (OMB), would take control of a controversial agency created by the Dodd-Frank Act to police the financial sector. The White House announced Kraninger's nomination on Saturday, less than a week before a key deadline to name a permanent director for the CFPB.”
But the White House may have a strategy to keep Mulvaney in the job. American Banker's Kate Berry: “Kraninger has no experience in consumer finance and is currently Mick Mulvaney’s deputy at the Office of Management and Budget, two points likely to guarantee opposition from Senate Democrats and a grueling confirmation battle that will likely stretch out for months. . . . But that risk appears to be part of the White House plan, according to industry observers, and ultimately designed to extend Mulvaney’s tenure as acting CFPB director for as long as possible. . . . The White House may even be secretly hoping Kraninger’s nomination is defeated. 'President Trump would not be the first president to make a nomination that won't get confirmed to extend the tenure of an acting official,' said Anne Joseph O'Connell, the George Johnson professor of law at Berkeley Law School.”
— Federal employees must report virtual money. The Post's Eric Yoder: “Virtual money is real enough that federal employees must report it on their financial disclosure statements and is covered by conflict of interest laws, the government’s central ethics agency said Monday. The Office of Government Ethics said guidance was needed because 'virtual currencies are experiencing a surge in use and access, and as a result, employees who hold virtual currencies are increasingly seeking guidance from their ethics officials concerning their financial disclosure reporting obligations.' While virtual currency does not have the status of legal tender, the Internal Revenue Service considers it 'property' for federal tax purposes and other federal agencies recognize it as an investment vehicle, the guidance said, making it subject to financial disclosure and conflict of interest laws applying to assets such as stocks and bonds.”
— From The Post's Philip Bump, via Quinnipiac University:
- Senate Appropriations subcommittee markup of the financial services and general government appropriations bill for fiscal 2019.
- Neomi Rao, administrator of the Office of Information and Regulatory Affairs, addresses the American Enterprise Institute.
- Commerce Secretary Wilbur Ross appears before the Senate Finance Committee for a hearing about tariffs tomorrow.
- Senate Banking subcommittee hearing on money laundering tomorrow.
- House Ways and Means subcommittee hearing on the return of taxpayers' funds seized under civil assets forfeiture tomorrow.
- House Financial Services Committee hearing on cutting taxes and red tape tomorrow.
- House Financial Services subcommittee hearing on illicit use of virtual currency tomorrow.
- Securities and Exchange Commission Chair Jay Clayton appears before the House Financial Services Committee on June 21.
- House Judiciary subcommittee hearing on the Bankruptcy Administration Improvement Act of 2017 on June 21.
— From the New Yorker's Farley Katz: