Yesterday Mr. Trump announced by tweet that he intends to impose a 10% duty, effective next month, on all US imports from China that are not yet under tariff. That’s about $300 billion worth, which would produce an extra $30 billion in tax revenue for the government, were imports to continue at the pre-tariff rates.
What’s different about the current move is that tariffs will be predominantly on final goods, that is, stuff that’s completely made and ready for sale, things like like toys and everyday clothing. For the first time, tariffs won’t be disguised. Up until now, they’ve been mostly on raw materials or parts, where the connection between the tax and price increases of the final product is obscured–the political fallout therefore milder. The new round will be more visible.
Standard microeconomics will apply:
–the cost of the new tax will be borne in part by US companies and in part by consumers, depending on how much market power each has
–over some period of time, companies and consumers will both look for lower-price substitutes for items being taxed. Firms will, say, offer lower quality merchandise at the current price point; consumers will either buy fewer items or shift to cheaper merchandise
The new tariff amounts to a subtraction of about $250 from family discretionary income, meaning income after taxes and all necessities are taken care of. That’s not a big number. As with the other Trump tariffs, however, average Americans will be disproportionately hurt. The bottom 20% by income have less than nothing after necessities now, so they will be the worst off. Residents of the poorest states–eight of the bottom ten voted for Trump–as well. So too anyone on a fixed income.
Netting out the positive effect of the 2017 income tax cut, the only winners are the top 1%, traditional Republican voters. Other Trump supporters appear to be the biggest losers, although far they don’t appear to have connected the dots. Nor does anyone in Congress seem to be questioning the administration rationale that national security does not require better infrastructure and education but does demand more expensive t-shirts and toys.
The stock market selloff underway today doesn’t seem to me to be warranted by the new tariff. And it’s not exactly news that Washington is dysfunctional: we’re led by a man who thinks our independence was won by controlling the airports; the leading opposition candidate somehow mistakenly thought his businessman/repairman/car salesman father was a laborer in the Pennsylvania coal mines. So the most likely explanation is that in August human traders/portfolio managers head for the beaches, leaving newspaper-reading robots in control of Wall Street.
If that’s correct, the thing to do is to look for stocks to buy where the selloff appears crazy, getting the money from clunkers, which typically hold up in times like this or from winners whose size has gotten too big.
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