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Tariffs on China: A Look Ahead

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MIKE TOWNSEND:  Trade tensions have escalated significantly recently, with the United States now engaged in trade disputes with Canada, the European Union, Mexico, and perhaps, most significantly, China.  Let’s take a closer look at the largest potential impact, China.

The Trump Administration announced in June that it would impose $50 billion in tariffs on Chinese imports. Those will go into effect in two tranches.  The first $34 billion in tariffs will take effect in July and will affect mostly industrial products in areas like aerospace and robotics. The second tranche of $16 billion will take effect later this summer. China has responded in kind, and that has led to a tit-for-tat exchange that now has the Administration looking at an additional $200 billion in tariffs on Chinese imports--but I think it’s important for investors to understand just how long this process takes.

The Administration needs to develop a list of actual products that will be impacted by the tariffs, and that list needs to be vetted publicly, with the business community given a chance to respond and push back, asking for certain items to be taken off the list. That process alone could take a couple of months.

There’s another factor at play here, too. The first set of tariffs didn’t really affect products that ordinary consumers buy, but this larger set is very likely to affect things like cell phones, televisions, clothing, toys.  People will start to feel the impact in the prices that they pay, and if that happens in the fall right before the mid-term elections, that could affect who they vote for in the ballot box.

Finally, one other thing to keep in mind: Trade disputes are among the least partisan issues on Capitol Hill. What’s more important to a member of Congress is how the trade dispute affects their constituents, and, particularly, the companies in their district or state. If you’re a member of Congress and your largest employer is negatively impacted by these tariffs, that’s going to really color how you view this issue. So far on Capitol Hill, reaction has been relatively muted.

Right now, there hasn’t been a real organized opposition, but as political pressure increases in the weeks ahead, that could change that dynamic.  Look for behind-the-scenes negotiations to take place over the next several weeks and months, as both sides--China, US, and their disputes with Canada, Mexico, and the European Union--try to come to a resolution that averts an all-out trade war, and that’s a resolution that the markets would like to see.

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