Washington Wednesday: Tariffs


MEGAN BASHAM, HOST: It’s Wednesday the 15th of May, 2019. Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Megan Basham.

NICK EICHER, HOST: And I’m Nick Eicher. It’s Washington Wednesday.

Last year, the Trump administration enacted 10-percent tariffs on $200 billion in Chinese-made goods sold in the United States. Tariffs are essentially taxes on imported products. The 10-percent levy was designed to inject urgency into trade talks the White House felt were not urgent enough. Washington and Beijing have been sparring since Trump came into office in part on a political platform of getting tough on China. He complained then and complains today that China cheats on trade. Not only that, but China steals trade secrets from American companies, violates intellectual property rights, and manipulates its currency.

The trade talks had been moving along fairly smoothly. But then earlier this month, President Trump said China had gone back on the terms of a proposed trade deal. He promptly increased the tariffs, more than doubling them, from 10-percent to 25.

And American stocks promptly took a nosedive.

In a public statement, investment bank Goldman Sachs pointed to academic studies showing the 10-percent tariff was worse than expected. For two reasons:

First, tariff costs fall entirely on U.S. businesses and households. Companies pass on the costs of tariff taxation to consumers in the form of higher prices.

Second, U.S. producers of competitive goods are free to charge similarly higher prices—and they have.

Those goods now number almost 4,000. They include everything from coffee to toys, smartphones, and shoes.

White House economic adviser Larry Kudlow acknowledged at least the shared burden in a Fox News interview on Sunday:

WALLACE: They may suffer consequences, but it’s U.S. businesses and U.S. consumers who pay, correct?

KUDLOW: Yes, to some extent. I don’t disagree with that. Again, both sides … will suffer on this.

And China is putting itself in a position to suffer, too. This week, the Chinese currency—the yuan—fell in value against the United States dollar. In practical terms, that makes Chinese goods cheaper and helps offset higher tariffs. But that also creates inflation pressure in China. The economist Milton Friedman famously said there’s no free lunch, and that applies to currency manipulation, too.

On Capitol Hill, normally free-trade Republicans are mostly supporting the president while hoping for a quick resolution. Here’s Congressman Barry Loudermilk. He’s a member of the House Financial Services Committee.

LOUDERMILK: As a free-trade advocate, you’re never excited about any level of tariffs, but on the same hand, you gotta use the tools that you have available to bring the others that are not playing by the same rules that we’re expected to play by. You gotta bring ’em to the table.

This week China announced it would increase tariffs on almost $60 billion in American-made goods. That sent the markets down again.

Joining me now to talk about it is David Bahnsen. He’s a financial adviser and analyst with offices in New York and California. Today, he joins us from California.

Good morning, David!

BAHNSEN: Good morning! Good to be with you.

EICHER: David, it’s been nearly a year since we last talked about tariffs, and as I mentioned, we’ve gone from 10 percent to 25.

But there’s a disconnect between what the president is saying and what I’m hearing from some Republicans on Capitol Hill.

Among them, I’m essentially hearing the tariffs are a necessary evil.

The president seems to be saying that these tariffs are really great. He says the tariffs added to economic growth, and said the tariffs, quoting from a tweet he sent out, “will bring in FAR MORE wealth to our country than even a phenomenal deal of the traditional kind.”

So how about that?

BAHNSEN: Well, first of all, if the president really believed what he is saying, why would we even be having negotiations? Why even try to do it if the better outcome is simply to increase taxes, increase tariffs?

The fact of the matter is that there are people—and I disagree with these people, too—but there are people who say, well, the tariff is as you said a necessary evil to kind of help negotiate. And so they’re not seeing it as a good thing as the president’s tweet suggests, but they’re seeing it as something done as a tool to get to a better place.

First of all, let me say this in President Trump’s defense, he’s been very sincere about this issue for over 30 years. I happen to think he’s completely wrong about it, but he was writing op-eds about Japan and America’s economic relationship with them in the 1980s. I think that his protectionist impulses, pro-tariff, anti-trade related rhetoric and related policy positions are very sincere. I think he truly believes it.

Of course the whole subject for me is I don’t think we need a politician to ever define what fair trade is. No party would engage in a transaction freely, voluntarily if they didn’t believe it was fair, if they didn’t believe it was in their best interest.

EICHER: I know we’ve talked about this before, but I think it bears repeating. The idea that China cheats, that China steals technology, that China extracts trade secrets from American companies in exchange for access to those markets.

I hear you when you say you don’t want politicians deciding what’s fair and what’s not, but how do you deal with what a lot of people acknowledge are abuses by Beijing?

BAHNSEN: Well, and this is where I think a lot of people have gotten themselves in trouble is they try to downplay or ignore that reality of which you speak, and then it leads to bad policy outcomes because you get people saying, well, if you’re not going to do anything, then we’re going to go do tariffs or we’re going to do something else that’s more destructive. And, frankly, it punishes the wrong actor.

The solution is to punish the wrongdoer.

And I don’t deny that there’s a wrongdoer.

The wrongdoer is the Chinese companies that are demanding their access to intellectual property so they can steal it, reverse engineer it, things like that. And, of course, the companies that are giving it to them. See, there is no reason for a U.S. company that is affronted by this practice to participate. They are aware of it. They can just simply say we’ll do business with you when you’re not stealing our IP.

All we have to do is develop the infrastructure to punish the wrongdoer on intellectual property theft. The president has decided to use the tariff route and they have now kind of late in the game said a lot of the tariff issue is to solve this intellectual property theft.

That was not what he originally said. He built a whole campaign around saying it was because it was unfair that the U.S. bought more from China than they bought from us. And so I have a hard time when the rationale for major global policy initiatives is changing. One of them could be legit and one of them could be illegit but I think it behooves us to have an honest conversation about why we’re doing what we’re doing.

EICHER: You know far more about the stock markets, I guess we could say you have forgotten more about the stock markets than I know. And so maybe this is overly simplistic. But my read is that Wall Street registered a disagreement with President Trump’s more than doubling of the tariffs with a big selloff.

All of the major indexes lost 2 or 3 percentage points just in a week, and that continued into Monday this week, before settling down a little bit. Do you think that that’s going to continue if we head down the road of an escalating trade war with China?

BAHNSEN: Sure, sure. The issue that’s very challenging for markets is markets are afraid to buy the bluff yet again. And what I mean by that is that if the markets really believed we were headed into a multi-decade kind of generational trade war that was going to constrict the global trade and access to new markets and so forth, the response would be far worse.

Now, I will say this: I don’t believe it is Wall Street expressing their discontent here but rather—and I know we sort of use that as a euphemism for all capital markets—but I think it is an overall reflection of investors, of retirees, of people with 401ks, of people with pensions.

This is something that has tremendous impact to both Main Street and Wall Street that this adds to uncertainty in an economy that doesn’t need additional uncertainty.

And we need business confidence to be higher in order to get greater business investment. That’s what was lacking for the entire time of the Obama administration is what we called “cap ex”: Capital expenditures into the U.S. economy. Those started to pick up significantly into the early part of the Trump administration behind really favorable tax policy, deregulation and more business friendly rhetoric.

And yet that is now completely reversed back down to Obama administration levels since this trade war was launched.

EICHER: Before I let you go, I’d like you to interact with one other idea. GDP growth came in really strong, stronger than most economists expected. They didn’t expect three percent plus, but it was. And I remember Larry Kudlow, who is one of the president’s economic advisers, saying this is really helpful to us. We’re going to use this to be very aggressive vis a vis China, which is feeling some economic stress right now. So we feel confident to push harder on China in these trade negotiations.

But on the other hand, does China not have leverage, too, against the United States holding something like $1.2 trillion— ‘T,’ trillion, not billion—in debt. How likely is it that the Chinese will use that leverage against us?

BAHNSEN: Well, it’s very unlikely but you’re right that that leverage point exists and we call it the “nuclear option,” and it essentially—you’ve got to understand what it would entail. If the Chinese were to start dumping their treasury supply, it would have a horrid effect on U.S. capital markets, significantly increase the cost of our debt issuance.

So our large deficits have to be financed and we finance them by issuing treasury bonds. And if all the sudden they were big, huge sellers of debt in the global market, it would have the effect of pushing the price of those bonds down and the yields or the costs of those interest rates higher. And that would be a huge leverage point China could use against us.

But, of course, you can’t go sell $1.2 trillion in one sale. So what they would be doing is hurting their own balance sheet. They would be basically tanking the price of the product that they themselves hold, namely these treasury bonds.

All of this, Nick, is so important. It indicates the insanity of what’s going on because we now are playing a game of economic mutually assured destruction.

Now, even my dear friend Larry Kudlow in his comment about 3.2 percent GDP growth gives us more leverage. No one can deny he’s right. Okay? We wouldn’t even be having this conversation if the U.S. was growing at the economic levels it was when President Obama was there. However, there is no way that the president wants to run for reelection with economic growth cut in half because of a trade war. So we’re going to get 3 percent economic growth and now all of the sudden we escalate this trade war further and end up with 1.5 percent economic growth,  I don’t care what anyone says, no one believes he can get reelected with that strong economic growth message coming off the table.

EICHER: David Bahnsen is a financial adviser and analyst based in California. David, I always enjoy these conversations and they come to an end far too soon. But great to talk with you and thanks for your time this morning.

BAHNSEN: Thanks so much, Nick.


(AP Photo/Evan Vucci) In this May 8, 2019, photo, President Donald Trump speaks at a rally in Panama City Beach, Fla.  

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