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Who pays for Trump's tariffs?

19 August 2019

President Trump's recent trade talks with China and his subsequent announcement of increased tariffs have caused sharp swings in equity markets. The sell-off that occurred at the beginning of August was triggered by Trump tweeting that the US would put additional tariffs on $300 billion worth of goods from the 1st September. Trump then later announced that some of these tariffs would be delayed until December, and the market reacted positively. Equities sold off again when it appeared that some of the tariff delays were just to save Christmas shoppers, but then found support when it was suggested that talks were still progressing. Trump claims that the US economy is doing well, the US is taking billions in tariffs from China, and that any damage to the US economy is due to the Federal Reserve (Fed) raising rates and quantitative tightening.

The stock market is still sharply higher this year, but the S&P 500 has barely changed from the level it was in January 2018, before Trump's first volley on tariffs in March that year. Tax cuts have failed to lead to capital investment but instead have been used to return money to shareholders. With the uncertainty over trade, investment decisions have been delayed.  Whilst many US companies profited from cheap manufacturing in China and globalisation,  the impact of tariffs are likely to be passed on to consumers or profit margins may suffer.  In the short term, the cost of tariffs falls on the US consumer or the investor.  But in the long run, it is expected that some manufacturing operations will relocate from China to the US and other countries not impacted by punitive tariffs.  China's economy is likely to suffer moderately, but the main cost will fall on individuals in the US, therefore Trump should want to do a deal ahead of the election next year.  

Trump's move to delay some tariffs being applied from 1st September to mid- December appears to acknowledge that the US consumer may be going to pay for his trade policy. Christmas decorations and cheap fireworks are on the list of items where tariffs will be delayed, as are other popular items that would make good Christmas presents. It seems that President Trump wants to avoid being labelled as "the Grinch" who stole Christmas.

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