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A Closer Look at U.S. Tariffs

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LIZ ANN SONDERS:  I don’t have to tell anybody that there are a lot of hot topics on which we can opine these days, but I want to focus in on what is probably top-of-mind for many people, which is the so-called trade war.  Now, I only put the qualifier of "so-called" because, arguably, we can’t quite define it as a full-on war. I think we are heading down a slippery slope, at least as it relates to China--and we’ve talked about trade and the possibility of a trade war being one of the biggest risks for the market and the economy--but I want to go inside what’s been happening with trade and tariffs and highlight two things that I think are not getting the attention that they deserve.

One, I think, is a bit of a misstep on the part of the financial media. I have seen on countless occasions headlines that come across the screen or pop up on my Twitter feed, or I see in the newspaper, that talk about the dollar amount of tariffs. I’ll use the most recent proposal--one that we are facing a month from now--which is tariffs on $200 billion dollars’ worth of Chinese goods. Now, that’s a proposed 25% tariff on $200 billion dollars’ worth of Chinese goods. The problem is many in the financial media will write the headline as "$200 billion in tariffs are set to take place," you know, whenever that is. Obviously, 25% of $200 billion is $50 billion. Now, that’s not a trifling sum, but it’s just inaccurate the way the headlines are written, so I just wanted to make that clear.

Then there’s another bigger picture issue that I think of, to some degree, as a bit of vicious circle. So we are a consumption-based economy. Most people know that. Sixty-nine percent of the US economy is driven by consumer spending. We just got a huge shot in the arm to consumer spending by virtue of fiscal stimulus in the form of tax reform and tax cuts that kicked in at the very beginning of this year. That had the effect of boosting the economy, and when you boost the US economy, and in particular, if it’s through tax cuts that benefit consumers, you boost consumer spending, consumer confidence. We’re seeing it in the numbers. So when you boost the economy and you boost consumer spending and you’re in that tight a labor market, to fill that demand you’ve got to go elsewhere. And what tends to happen when you boost consumer spending is it widens the trade deficit. That’s because we buy more imported goods than we export.

The trade deficit is being used as a yardstick, as a rationale for moving into this trade war or trade skirmish, as we’ve been calling it. Yet at the same time, tax cuts have helped to boost the economy, boost consumer spending, which, in turn, will widen out the trade deficit, because we simply buy more imported goods. Yet a widening trade deficit may be used as a rationale for more tariffs. 

So I’m just not quite sure how we get out of this circle, but it’s an aspect to this so-called trade war that I think very few people are either talking about or focused on, which is why I wanted to devote this video to that, so thanks.

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