“The next few weeks could be rocky.”

Bank of America’s fortune cookie writers may have undersold their case…

The trade war famously reopened Friday. The United States imposed 25% tariffs on $200 billion of Chinese products.

Come this morning, China announced retaliatory tariffs on $60 billion of United States products.

They enter effect June 1 — unless a negotiated truce first washes them out.

CNBC lists the butcher’s bill:

Beijing will increase tariffs on more than 5,000 products to as high as 25%. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously. 

American agricultural products were not excepted. Soybean and cotton prices went plummeting today… in consequence.

Additional retaliation, suggest some Chinese sources, may await.

Trade war, like any other war, is harder to stop than to start.

China Maximizes the Market Impact

Was it coincidence that this morning’s blast arrived in time for opening whistle on Wall Street?

Samantha Azzarello, global market strategist at JPMorgan:

China retaliating as fast as they did was a clear signal they’re not going to be pushed around… It was interesting it wasn’t done on the weekend. It was done just in time Monday morning for markets to open.

On cue the floodgates swung open at 9:30… and a red deluge came washing down the canyons.

The Dow Jones was instantly 400 points under… then 500… 600… and 700 by early afternoon.

By midafternoon the worst of the hemorrhaging was plugged.

The Dow Jones ended the day down 617 points.

But for the first occasion since February, it has slipped beneath its 200-day moving average — which has the chart watchers shaken and rattled.

The S&P lost another 70 points today.

But percentage wise, the trade-sensitive Nasdaq withstood the worst slating of the three — down 270 points on the day — or 3.41%.

“Very bad for China, very good for USA!”

President Trump laughed off all concerns this morning… and insisted China is brunting the true impact.

Their [sic…] is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China today… Also, the Tariffs can be completely avoided if you by from a non-Tariffed Country, or you buy the product inside the USA (the best idea). That’s Zero Tariffs. 

Here he digs his thumbs into China’s eyes, and gives them a good hard twist:

Many Tariffed companies will be leaving China for Vietnam and other such countries in Asia. That’s why China wants to make a deal so badly! There will be nobody left in China to do business with. Very bad for China, very good for USA!

The American Consumer: Hidden Casualty

But the president’s top economics man — Larry Kudlow — conceded this weekend that American consumers will in fact pay much of the freight.

Companies that accept imports actually pay the tariffs at water’s edge.

These costs they pass along to the consumer further down the line.

Thus tariffs represent a tax increase upon Joseph and Jane Average American… who must stretch deeper into their pockets to purchase the same goods.

And now that China has responded in kind, Chinese demand for American products will slacken.

Oxford Economics has issued a new report. It reveals…

That a 25% tariff on $200 billion of Chinese goods imports would cost the United States economy $62 billion once all scales are balanced, once all accounting is settled.

That figure amounts to $490 per household… incidentally.

What if the president levies additional tariffs on all Chinese wares, as he has threatened?

Oxford estimates total economic losses would cost the United States some $100 billion by next year — or $800 per household.

The Seen vs. the Unseen

The president must have misplaced his copy of Economics in One Lesson by legendary economics journalist Henry Hazlitt.

From which:

This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups…

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond… The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.

Hazlitt’s is a faint and feeble voice coming from the tomb.

There is the seen, he reminds us… as he struggles to rise above the din of the living.

But there is also the unseen.

You must consider the unseen effects of any given policy.

But it requires a special effort of the imagination. And few can conjure the image…

The Unseen

They cannot observe the lost jobs, the money unspent on other goods, the cost of retaliatory tariffs.

Here is what the president does not appreciate…

The businesses that will not open or will not expand because the inputs of industry are costlier…

The money Americans will not spend on other goods and services because they are expending more for these goods…

The American products that will go unsold abroad because of the tariffs China throws up in retaliation.

Or as another president, Woodrow Wilson, once said in reference to the sugar tariff:

“Very few of us taste the tariff in our sugar.”

Few ask the right questions… connect the proper dots… draw the right conclusions.

Heave 100 bricks off a rooftop in any American city.

One — perhaps two — will find a man who tastes the tariff in his sugar.

That is precisely how the political men prefer it.

But the costs are nonetheless real.

In the Unseen… We Will See the Light

Yes, it is true… tariffs may open one door for one American.

But they slam one door shut on the nose of another.

For every extra dollar that jingles in the one fellow’s pocket… one less dollar jingles in the other fellow’s pocket.

This fellow will see his pay envelope shrink — in effect, his taxes raised.

In conclusion, tariffs benefit few. And damage many.

Let us instead direct our focus to the unseen, as a wise voice whispers from beyond the grave.

It is here — in the unseen — that we will see the light…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning