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Is Trump’s Trade War Good For Your Wallet?

Hank Fishkind, Trump Tariffs, Trade War

With Hank Fishkind, Founder of Fishkind and Associates, a full-service economic and financial consulting firm

On June 24, 2018, Donald Trump tweeted:

“The United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than Reciprocity by the U.S.A. Trade must be fair and no longer a one-way street!”

So is this the beginning of a serious trade war?  If so, how is it going to impact the general public? To figure it all out, Steve speaks with Hank Fishkind, Founder of Fishkind and Associates, a Florida-based full-service economic and financial consulting firm.

Trade War Rhetoric With China

Trump has slapped a 25% tariff on 818 imports from China, worth $34 billion annually.  Trump’s tariffs go into effect on July 6, 2018.  In retaliation, China plans to impose equivalent tariffs on 34 billion dollars of goods imported from the U.S.

Trump explains his actions as a step toward protecting American jobs and the U.S. economy and offsetting unfair trade practices that China has pursued for many years.

Understanding America’s Trade Deficit With Trading Partners

A trade deficit is the difference between the value of our exports and the value of our imports.

While the U.S. imported goods worth $505 billion from China last year, China only bought goods worth $130 billion from the U.S.

A gap that big is cause for concern.  But it can be offset by capital inflows if China makes sizable investments in the U.S. to balance out the deficit.

For example, the U.S. had a trade deficit with Germany.  But many German firms have set up factories in the United States, have created jobs, and are selling American-made products.  This partly offsets our trade deficit with Germany.

China has invested a lot of its capital into U.S. Treasuries, which helps keep interest rates lower in the U.S.  But China hasn’t done enough to address its yawning trade gap.  Worse still, China has a history of unfair trade practices that irk its trading partners, including the U.S., which is China’s biggest export market.

Tariffs Bad, Quotas Good

A tariff is essentially a tax on imports.  The threat of a 25% tariff on Chinese imports is Trump’s way of pressuring China to address the deficit.  But tariffs have the effect of increasing the prices of goods and services, which hurts the economies of both countries and may serve no one’s interests.

Alternately, Trump could impose quotas.  Quotas place limits on the number of goods and services that we can buy from China and our other trading partners.  Quotas can be good because they encourage other nations to step in at lower prices to meet our needs and diversify our supply sources.

The blame for lost U.S. jobs isn’t all China’s fault.  America has lost jobs due to increased automation, artificial intelligence, and the globalization of the supply chain, in general.

Tariffs’ Impact On Florida’s Economy

In closing, Hank notes that Trump’s tariffs could impact Florida’s aerospace and electronics export industry.  U.S. tariffs on imported steel and aluminum would make Florida-made goods less competitive.  Consequently, countries that don’t have tariffs on steel imports, such as Germany, could take market share away from Florida.

Moreover, tariffs would increase prices on a slew of consumer goods and add to inflationary pressures that are already building up in a U.S. economy that’s currently running at full employment.  In the worst case, a full-on trade war would make things more expensive for U.S. consumers and could hurt our economy and American jobs.  So let’s hope his negotiation tactics work to our benefit, without upsetting the apple-cart!

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Our President, Donald Trump, has slapped steep tariffs on billions of dollars worth of Chinese goods, ranging from dishwashers to aircraft tires, and he seems to be adding more weekly. But China has responded by quickly announcing its own tariffs on US goods. So is this the beginning of a serious trade war?

And if so, how is it going to affect us, the general public? To help us figure this out, I’ve asked Hank Fishkind, Founder of Fishkind and Associates Inc., a full-service economic and financial consulting firm, and Hank joins me today. Hank, by the way, is interviewed regularly on 90.7 FM, Orlando’s NPR station, WMFE.

Hank, welcome to the show.

Hank Fishkind: Thank you, Steve.

Steve Pomeranz: So why is Trump implementing tariffs and basically forcing the world’s two largest economies to be at each other’s throats?

Hank Fishkind: Well, the President explains his actions in terms of protecting the American economy and protecting American jobs and offsetting the unfair trade practices that everyone acknowledges that China has pursued for many, many years.

Steve Pomeranz: We have a large deficit, trade deficit, with China, and I know President Trump has railed against that. What is a trade deficit? What does it mean? And is it a bad thing necessarily to have or is it good in some ways?

Hank Fishkind: Well, a trade deficit is measured in terms of the difference between the value of our exports and the value of our imports.

And so, yes, that trade deficit can be problematic if it gets too large or too small. At moderate range, a trade deficit isn’t necessarily a bad thing if it is offset by capital inflows. In other words, if the extra money that goes to a foreign country is reinvested in the United States, then the trade deficit, per se, is not good nor bad. Depends upon the type and the magnitude, Steve.

Steve Pomeranz: When you say reinvested, are we talking about China buying our treasury bonds? Or are we talking about China coming to the United States, buying real estate, setting up businesses? Is there a difference there?

Hank Fishkind: Yes, we’re talking about both. For example, we have a trade deficit with Germany. And many German firms have put factories into the United States. And so, that has the effect of reinvesting that money, creating jobs and income in the United States, and beginning to offset the trade deficit that used to be larger with Germany.

Same kind of thing could happen with China, depending upon what the reinvestment is in. Certainly, an investment recycling into US treasuries tends to keep US interest rates lower than they otherwise would be.

Hank Fishkind: And that’s a benefit to the US economy. But the type and magnitude of the trade deficit does matter. And China’s unfair trade practices are not fully recorded in the size and magnitude of the trade deficit per se, Steve.

Steve Pomeranz: So let’s get to this word tariff. I’d like to know what exactly is a tariff and what kind of products are currently on the table.

Hank Fishkind: Well, a tariff is an import tax, in essence, and of course, we have steel and aluminum. And now we have a wide array of other carefully selected Chinese goods that have tariffs. And there’s a threat for another large increment of tariffs to go into effect July 6th, assuming that China and the United States can’t come to some kind of agreement.

Steve Pomeranz: Are these tariffs enforced, or are they just threats at the moment?

Hank Fishkind: Most of them are threats, but they will come into force, I believe it’s July 6th, Steve. So they’re imminent.

Steve Pomeranz: I see. So there may be 11th-hour negotiating and this may be the Trump administration’s way of just trying to push the envelope until the very end to try to get some concessions. Are you seeing it like that or are you seeing this as something more fundamental?

Hank Fishkind: I think both sides wish to avoid an all-out trade war, it is in no one’s interest, not ours, not theirs. So certainly, there’ll be some kind of bargaining between now and then. Hopefully, the two sides will stand down from a major trade conflict.

Steve Pomeranz: Now, there is this idea of a tariff. But it’s only one idea as a way to deal with the alleged or whatever China’s unfair trade practice is. And another idea is a quota. What is a quota and how does it compare against a tariff?

Hank Fishkind: Well, a quota would be a volume limitation on what could be imported from China, for example, and that could be by specific types of goods. A tariff, as we said, that’s an import tax. So as a tax, the tariff tends to cause prices to go up directly on the tariffed goods. And it also causes the prices to go up on all of the goods that use the tariffed goods, and it pushes up prices more generally.

A quota on Chinese imports, for example, would allow for imports to come in from other countries and tends to have less of a distorting effect. And also tends to be more effective, Steve, because it’s an absolute limit on what China could export into the United States.

Steve Pomeranz: So I understand a quota because recently I did a segment on the recycling challenge that many cities are facing. In fact, that China has stopped buying a lot of our recycling, and in effect, from your definition, that would be a quota. They have their own reasons, and they said, we’re only going to be buying x amount. But they haven’t said, listen, we’re raising the prices or we’re lowering the prices on this recycling.

But hey, Hank, this reminds me of something, though. The effect of their quota on recycling actually created a huge drop in the price of recycling. So can a quota also affect prices?

Hank Fishkind: Yes, a quota absolutely will affect prices. It affects them in a somewhat different way and it allows for a little more substitution. And a quota is, as we said, a direct control.

Steve Pomeranz: Right, hey, someone said recently that this whole fight over tariffs or this negotiation, as you say, was like a barroom brawl. It starts pushing, and then there’s a punch to the face, and then a beer bottle gets hit over someone’s head. And then finally someone is thrown through a plate glass window. [LAUGH] Do you see this escalating to that degree?

Hank Fishkind: I hope not, but that’s exactly what could happen if we’re not very careful. And it would be very detrimental to the US and be very detrimental to the Chinese economy and the global economy more generally.

Steve Pomeranz: Right, and nobody wants that, I’m sure.

Hank Fishkind: No, no.

Steve Pomeranz: 1922, Congress had enacted the Fordney-McCumber Act, which was among the most punitive protectionist tariffs passed in the country’s history, and they raised the average import tax some 40%. Then in 1930, the Smoot–Hawley Tariff Act further raised import duties to protect American businesses and farmers.

And that added considerable strain to the international economic climate of the Great Depression. Now, right now the US economy is quite strong like in 1922. And the tariff’s, like back then, did little to dampen the economy because the US economy was so strong. And similarly, the US economy is strong today.

So are there similarities here in which the tariffs might not hurt us for a while? But then if we do have some economic negativity then it may hurt us in the future.

Hank Fishkind: That would be somewhat the effect. But I think the difference between 1922 and 2018 is today we have an environment where the Federal Reserve has embarked upon a program to raise interest rates, normalize monetary policy and stop buying as many US bonds to shrink its balance sheet.

All told, it’s causing interest rates to rise. So we have rising interest rates, the economy is basically running at full employment, so there is the risk of heightened inflation. Tariffs are by their very nature inflationary, which will just exacerbate the squeeze in financial markets. Biggest risk to the economy now, Steve, is probably in the financial market. We’ve had a significant sell-off in the stock and equity markets since this last week where the trade roar is heated up.

Steve Pomeranz: My guest is Hank Fishkind, he’s the Founder of Fishkind and Associates, a full-service economic and financial consulting firm located in Orlando, Florida. Recently, Lloyd Blankfein, the head of Goldman Sachs, said in an interview that privately a lot of US companies are complaining about China’s unfair trade practices. So would you say that there is justification for this administration’s aggressive tactics?

Hank Fishkind: Absolutely, I take issue not with the policy. I take issue with the tactics. A tariff is not the way to go about correcting China’s unfair trade practices, Steve.

Steve Pomeranz: Now, he’s doing this and he’s said he’s doing this because he thinks that China’s unfair practices are weakening the strength of the US economy and employment in certain manufacturing areas and the like. Is that the only thing? Is China the only reason that we have this problem? Or are there other drivers for the loss of US manufacturing and other jobs?

Hank Fishkind: There are other drivers that actually are more important, Steve. Automation, artificial intelligence, the globalization of supply chain are all factors that have had a more significant impact than China.

China’s had some impact; China has been the way in which the globalized marketplace has caused these transfers. But this is happening not just in the United States, it’s happening in all developed countries throughout Europe. And a good example is how the textile industry left New England, went to the South, left the South, went overseas, went to China.

Now the textile industry’s in Pakistan and Indonesia and Vietnam. So these kinds of things happen regularly because of global economic forces and technological change, not just because of China’s unfair trade practices.

Steve Pomeranz: If you look back to the Industrial Revolution, the United States at that time, England was the major power in the world, the major economic power. And a lot of the manufacturing came over to the United States because we were the cheap labor force back then.

Hank Fishkind: That’s right!

Steve Pomeranz: This is something that happens regularly. And now a lot of the manpower is now being replaced by robots, AI, as you mentioned, and just technology is starting to take over as another leg in this down the chain, so to speak, of cheap manufacturing, so there’s a lot more to it.

Hank, why are we fighting with Canada of all places? Our neighbor to the north that seems really so benign. I mean, who wants to fight with Canada? What’s going on there?

Hank Fishkind: Well, the president is using this to gain leverage in the NAFTA talks because as you said it makes no sense to fight with Canada when Canada is not a threat to our national security.

I mean that’s on its face, preposterous. So it’s obviously just a ploy. Regrettably, it has very damaging implications for our bilateral relationships.

Steve Pomeranz: Now, you recently spoke with WMFE in Orlando. And you talked in detail about the effects of the Trump tariffs in Florida. So let’s bring this thing close to home. Fundamentally, I want to try to figure out how it’s going to affect us in our wallets. What should we expect here in the state of Florida?

Hank Fishkind: Well, there’s a couple of things. I think that Florida’s international trade is a bit under-appreciated by Floridians. It represents in dollar terms, almost 10% at gross state product at $147 trillion.

So it’s a big deal, $147 trillion. Most of our exports, interestingly, tend to be in aerospace and electronics of goods and services. And there is a lot of metals, aluminum, and steel in those products. So to the extent that the tariffs cause those prices to go up, it may make us a little less competitive in selling those goods to Brazil or to other South American countries where we mostly sell them. The Brazilians can buy those products from other places that don’t have tariffs, like from Europe.

Steve Pomeranz: So rising costs for raw materials is going to affect us as well because these raw materials go into cars, they go into washing machines, they go into aerospace, as you said. So are we truly looking at an inflationary spike here, in your opinion?

Hank Fishkind: Potentially yes. If we get into a trade war, it will add to the inflationary pressures that are already building in the US economy. We’re running basically at full employment now. We get passed a tax stimulus package at an inopportune time, so we have yet to feel the full impacts of the recent tax cuts. This all comes at a time when the Federal Reserve, as I said, is raising interest rates and restricting the money supply. So to add another increment to pressure through tariff is poor timing, to put it mildly.

Steve Pomeranz: I want to thank Hank Fishkind, Founder of Fishkind and Associates, located in Orlando.

And don’t forget as you can see here, we value education. We want to make sure our listeners are getting what they need. So simply go to stevepomeranz.com to join the conversation. Let’s hear your opinion. If you have any questions again, come to stevepomeranz.com. Thank you for joining us. Thanks for joining us.

Thank you for joining us, Hank.

Hank Fishkind: Steve, thank you.