The Economist - USA (2019-08-17)

TheEconomistAugust 17th 2019 53

1

“T

here’s tariffson games and tariffs

on toys—try explaining tariffs to

your little boy. Santa’s workshop is strug-

gling, you’ll find yourself saying. I think

the reindeer are backed up with their

sleighing.” Wendy Lazar, who runs a com-

pany called I Heart Guts, submitted this

peeved poem to the United States Trade

Representative (ustr)in June. As an im-

porter of children’s toys from China, she

was complaining about how the trade war

could squeeze her firm.

She is not alone. In boardrooms across

America, business people are scrambling

to assess the impact of the latest escalation

in the commercial confrontation between

the two superpowers. For most firms the

easy bit is calculating the immediate finan-

cial impact of more tariffs on demand,

prices and costs. That can be done in a

spreadsheet. Far harder is working out how

to rejig your strategy and long-term invest-

ment plans to adapt to a new world of en-

during trade tensions. Fund managers and

Wall Street traders have begun to reach

their own conclusion—that investment

may slump, possibly triggering a recession.

Hence the violent moves in markets since

the first week of August, with a rush to-

wards safe bonds and a sell-off in equities

(see the next article).

That sell-off picked up pace on August

1st when President Donald Trump’s admin-

istration announced the imposition of ta-

riffs on $300bn of Chinese goods, at a rate

of 10%, starting on September 1st. On Au-

gust 13th the ustrannounced a delay cov-

ering about two-thirds of the goods in

question, including mobile phones, smart-

watches and toys, which would be subject

to duties starting on December 15th. As Mr

Trump explained later that day, the move

would allow American shoppers to splurge

in the run-up to Christmas. The press re-

lease announcing the delay arrived at

9.43am; between 9.40 and 9.45 shares in

Apple rose by 3%, and the s&p 500 share in-

dex jumped by 1%. But by the following day

the stockmarket—and the iPhone-maker’s

share price—slumped again as investors

fretted that a global downturn might soon

be on the cards.

America’s expansion may be cooling as

it enters its second decade, but gdpstill

grew at a respectable pace of 2.1% in the

second quarter of 2019, and the unemploy-

ment rate is a brag-worthy 3.7%. The direct

effect of the tariffs should be small: in 2017,

before hostilities began, goods trade with

China amounted to just 3.2% of gdp. Even

including the additional levies planned for

December, they represent a tax rise offset-

ting only a fifth of the cuts introduced by

the Tax Cuts and Jobs Act of 2017.

What really matters, though, is the wid-

er effects of the uncertainty created by the

trade war on corporate behaviour. Most

The trade war and America’s economy

Under attack

WASHINGTON, DC

How is the trade war affecting corporate investment?

Finance & economics

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59 Freeexchange:BrettonWoods II

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