The Trump administration has imposed its latest round of trade tariffs against China and threatens that more is to come. The U.S. is seeking trade agreements that are ‘fair’ to the United States.
German leader Angela Merkel agrees, in principal, with a U.S. plan to eliminate all auto tariffs between the two nations, but believes such a deal must apply to all EU trading partners.
Despite escalating trade threats, economic readings continue to improve, easing investor concerns about the economic impact of outright trade wars.
Effective last Friday morning, July 6, the U.S. started imposing 25% import tariffs on $34 billion worth of Chinese goods. The $34 billion is the first part of new duties on a total of $50 billion that President Trump announced in June. The second part, additional tariffs on $16 billion in Chinese imports, is expected to take effect in two weeks. China promised to react in kind. Simultaneous with the new U.S. duties, Beijing implemented retaliatory tariffs on 545 U.S. exported goods also worth $34 billion, primarily targeting American agricultural products - soybeans in particular. Soybeans are the largest U.S. export to China, followed by civilian aircraft and motor vehicles.
Turning to the European Union (EU), President Trump is considering tariffs of 20% -to 25% on European automotive-related products, citing national-security concerns. Presently, the U.S. charges 2.5% duties on passenger cars and 25% on light trucks, whereas the EU imposes 10% tariffs on each. Recently, the Trump administration has offered an olive branch to Germany, which dominates the European auto market, whereby the U.S. would agree to entirely eliminate its tariffs on auto industry goods if Germany does the same.
After receiving a positive response from the CEOs of German automakers for this “zero-for-zero” tariffs plan, German Chancellor Angel Merkel voiced her support for the plan. However, any deal would be months away as Merkel said Germany couldn’t act independent of the EU. Therefore, such a plan needs agreement on an EU-wide level, that requires equal treatment with all of its trading partners, according to World Trade Organization rules. Even so, the pathway for true free trade has not only encouraged investors in the automotive sector, it has bolstered sentiment as a possible model across all sectors and regions.
Despite the implementation of new tariffs, U.S. equity markets ignored these developments and moved significantly higher. Investors focused on positive economic fundamentals, such as the release of the June employment report. That report stated the U.S. economy added 213,000 new jobs in June, topping economists’ consensus forecasts Upward revisions for April and May added a further 37,000 jobs. The unemployment rate did rise to 4.0% from 3.8%, but this was for a good reason, as 601,000 people returned to the workforce in June.
The jump in prime-age (25-54) labor force participation is near eight-year highs; female employment had the largest one-month advance since 1994. Moreover, wage gains unexpectedly slowed to 2.7% year-over-year from 2.8%, indicating the labor market is still absorbing spare capacity, boding well for continued low inflation.
With a backdrop of solidly favorable U.S. economic winds, we feel the current trade tensions should be viewed as skirmishes, with the White House willing to apply increasingly heavy pressure against China before a full out trade war ensues.
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