The United States has increased taxes (tariffs) on the US consumer once again with $34 billion of goods partially made in China now subject to a 25 percent tariff.
This consumer tax was designed to minimize the impact on the U.S. consumer. So, this particular tax is something of an economic practical joke. The main consequence of this is likely to be a shuffling of global trade routes as non-Chinese goods substitute for Chinese goods in the United States and Chinese goods substitute for non-Chinese goods elsewhere.
President Trump was sounding more and more agitated over the issue of raising taxes overnight and confirmed that the United States would begin collecting tariffs on Chinese goods at 12:01 a.m. Washington D.C. time and warned that subsequent rounds could see tariffs on more than $500 billion of goods, or roughly the total amount that the United States imported from China last year.
The trade actions so far are an economic fiasco. About two thirds of the consumer tax will probably be avoided.
However, the talk is more serious. The minutes from the Federal Reserve's June FOMC meeting reported concerns that US investment spending would be affected by uncertainty over trade policy. It’s questionable whether the damage done to certainty by this art of the deal style posturing could in fact be reversed.
It is worth remembering that the US is pursuing isolationism. The world is not pursuing a trade war. Companies may question the merits of investing in an isolated and unpredictable economy.
If President Trump were to go ahead and raise US consumer taxes (tariffs) on half a trillion of dollars of sales that would constitute a “trade war.”
Because of the complexity of global supply chains, taxing US consumers in this way would be bad news for US companies specifically. The United Nations estimates that about 40 percent of global trade today takes place “inside” multinational companies, which tend to be part of the equity market.
The minutes from the Federal Reserve's June FOMC meeting
The minutes from the Federal Reserve's June FOMC meeting offered few other surprises. The overall message is that the Fed’s tightening policy is a-quarter-point-a-quarter pace. The Federal Reserve keeps communicating its messages as clearly as it can and finally the market seems to be listening.
The Fed was also relatively dismissive about an inverted bond yield curve saying anything at all about the future path of economic activity. This is quite right.
Back in the 1970s, inflation was the biggest part of a bond yield. Inflation went down when growth went down. Therefore, if bond traders expected an economic downturn, they would expect lower inflation and bond yields would go down at the long end of the curve.
Today, inflation is not the biggest part of the bond yield because inflation is low, special factors are more important in driving inflation and there is no longer any guarantee that inflation will go down when the economy goes down. There is no reason for an inverted yield curve to reflect the future of the economy, unless you think that bond traders are better at economics than are economists at economics. No one is better at economics than economists are.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.