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Trump Calls for Tariffs Over Taxes… Sparks Trade War Fears

Donald Trump gets ready to take office in just a few days. The time leading up to his inauguration has been a whirlwind of political and financial action focused around Trump’s promises to increase jobs and strengthen the U.S. economy. Why are economists so worried?

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Donald Trump gets ready to take office in just a few days. The time leading up to his inauguration has been a whirlwind of political and financial action focused around Trump’s promises to increase jobs and strengthen the U.S. economy. And while Republicans have started to rally around the new president, there seems to be a little rift within the party. Paul Ryan and the GOP have introduced a new plan called the border adjustment tax, which the GOP believes will boost U.S. manufacturing. But Trump has criticized the plan and is calling for something economists fear will start a trade war. Why are economists so worried? What’s the best course for the U.S.economy?

Why Tariffs Over Taxes?

After fears of his unpredictability quickly receded, the stock market has had a historic rally behind Donald Trump’s election victory. Trump has held to his promise of increasing jobs so far by threatening companies who move manufacturing plants from the U.S., rewarding those who stay, and even meeting with Jack Ma, CEO of Chinese online retailer Alibaba to discuss the creation of 1m U.S. jobs. Another effect of Trump’s win is the surging strength of the U.S. dollar, which just two weeks ago hit a 14 year high. On Tuesday, Anthony Scaramucci, a senior advisor to Trump, warned about the risks of a strong dollar at the World Economic Forum. But when the GOP presented a plan which could mitigate the strength of the dollar while improving jobs and the economy, Trump said it’s “too complicated”.

Why Tariffs Over Taxes? #1 | Trump Calls for Tariffs Over Taxes... Sparks Trade War Fears

The fact is, a strong dollar has its pros and cons. The stronger our currency, the more we can buy with it. That’s great for importing goods from other countries, but actually hurts U.S. exports since other countries then have to pay more for American goods, leading them to look for cheaper goods and materials from other countries. As the dollar continues to soar, the concern for manufacturers and companies is foreign competition, specifically China, undercutting American bids. As a result, jobs and the American economy suffer. On the other hand, a weak dollar makes imports too expensive for some consumers, but can boost the economy by increasing manufacturing jobs through cheap exports to other countries.

It’s a fine line to walk, and the GOP is busily looking for solutions. One such solution is the border adjustment tax, or BAT. The BAT isn’t actually a tax, or even a tariff. While a tariff affects imports, a BAT would affect both imports and exports. A BAT is basically a readjustment of how the country taxes imports and exports. Companies would no longer be able to deduct the cost of their imported goods, and the sales of their exports would no longer be subject to U.S. tax. This gives American companies the ability to sell their goods more cheaply abroad since they would no longer have to pay taxes on exports. Supporters of the BAT say this would increase U.S. manufacturing and exports, thus boosting the economy. Critics say that by driving up demand for U.S. goods abroad and by making imports more expensive, thus driving down demand for foreign goods, the dollar will continue to strengthen, eventually hurting the economy.

Trump’s solution is tariffs.

There are a few problems with that. A tariff would only affect imports, which would then raise the price of consumer goods for Americans, hurting spending and the economy. The bigger concern is that by implementing tariffs against other countries, they would then respond by placing tariffs on American exports, lowering demand for U.S. goods abroad. A trade war could cause a global recession as demand for foreign goods the world over would drop.

Watch the news report as Trump’s economic adviser Steve Moore discuss Trump’s tax plan on Fox Business:

In the end, what’s most likely to happen is there will be some sort of compromise between Trump and the GOP to amend the BAT to Trump’s liking. One thing is sure, however, and that’s that trade war is a lose-lose situation which must be avoided at all costs.

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5 Comments

  1. Avatar

    Filmaker

    January 18, 2017 at 12:42 PM

    This whole argument has one fatal flaw that renders it moot. There are no Dollars involved, only the government approved counterfeit currency issued by the Federal Reserve Bank. Real Dollars have been unavailable to anybody since 1974. Easier to monkey with.

    • Avatar

      RevIdahoSpud3

      January 18, 2017 at 2:17 PM

      Good Point! It’s funny how you can get swept away with the arguments in the article and forget the realities. Even though the dollar is just a figment of everybody’s imagination and is not backed by anything, especially gold.
      If each dollar issued had an equivalent amount of Gold or some tangible of value the purists (I among them) would feel more secure. The dollar for now is backed (linked) to oil (petro dollar) and that has worked since the early 70’s. Will the petro dollar lose it’s credibility as the oil industry fights for survival? Likely, but beyond the petro dollar currently and into the future the fake dollar will continue to function despite being created out of thin air.
      Most of the world uses the dollar and notwithstanding the fact that it is valueless in a tangible way the amazing thing is that many nations use the dollar as their domestic currency while other countries peg their own currency values to the dollar. The phenomenon that world wide the dollar is looked at and accepted as having value based upon the stability of the United States as a political system is what drives its value. We could use moth wings as well and if everyone agreed that they have value then the same condition would exist.
      What is the likelihood that everyone world wide will wake up at the same time and realize the dollar has no value? Perhaps a good share of people (nations) realize that now. Without an alternative fiat the chaos that would ensue does not justify currently taking the risk.

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Economy

After Worst Trading Day Since 2008, Stocks Rocket Higher As Trump Teases Tax Cuts

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After Worst Trading Day Since 2008, Stocks Rocket Higher As Trump Teases Tax Cuts

In a surprise announcement late Monday evening, President Trump said he is working on an economic relief package intended to help those who have been hurt by the coronavirus outbreak.

Trump briefly mentioned a possible payroll tax cut, before saying the relief would be “substantial” and “a really big number.”

Trump said he is meeting today with Republicans in the House and Senate to discuss the possibility of suspending payroll taxes, which is paid by both employers and employees to fund Social Security. 

Suspending the tax would boost the size of worker’s paychecks, something Trump has suggested before as a way to boost the economy.

Secretary of Treasury Steve Mnuchin says if the payroll tax is suspended, it will be a temporary move intended to last only a few months until the coronavirus has passed.

“The economy will be in very good shape a year from now. This is about providing proper tools of liquidity to go through the next few months.”

As part of Trump’s plan that we should learn more about this afternoon, the President also mentioned “working on loans for small businesses” and working to help the airlines, cruise lines and hotel industries as they have been hit hard by the coronavirus fears.

He added “We’re going to be working with companies, small companies, large companies, so that they don’t get penalized for something that’s not their fault. It’s not our country’s fault. This is something that we were thrown into.”

The news comes on the same day the stock market had its worst trading session since 2008 and it’s 19th worst day ever, with the Dow Jones Industrial Average plunging more than 2,000 points to close down 7.79% on coronavirus fears and plummeting oil prices.

Trump has consistently focused on the stock market as a barometer for his success as a president, so announcing this relief plan after a historically bad day for the markets doesn’t come as much of a surprise.

At the close of the market Monday, the Dow Jones Industrial Average is down 19% from the all-time high of 29,551 on February 12, less than one month ago. The bull market that started on March 9, 2009 would officially come to an end if the markets drop 20% from their all-time high.

Trump’s announcement sent futures higher, indicating the markets should open trading this morning 1,000 points higher than Monday’s close.

Even if Trump can get a relief plan passed, it’s uncertain if it will be enough to convince buyers to step back into a bull market that is on shaky ground entering its 11th year. 

The coronavirus outbreak is widely expected to worsen over the coming weeks and months, and the energy market is reeling from last weekend’s fallout between Saudi Arabia and Russia.

And according to JPMorgan, historically “a market sell-off of this magnitude typically implies a 65% to 75% chance of recession in the next 12 months.”

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Finance

Dow Jones Industrial Average Breaks 29,000 For The First Time in History

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Screenshot of Dow Jones Industrial chart taken January 15, 2020.
By ELAINE KURTENBACH, AP Business Writer

Slight gains send Dow Jones Industrial Average above 29,000!

The Dow Jones Industrial Average closed above 29,000 points for the first time and the S&P 500 index hit its second record high in three days Wednesday.

The milestones came on a day when the market traded in a narrow range as investors weighed the latest batch of corporate earnings reports and the widely anticipated signing of an initial trade deal between the U.S. and China.

President Donald Trump and China’s chief negotiator, Liu He, signed the “Phase 1″ deal before a group of corporate executives and reporters at the White House. The pact eases some sanctions on China. In return, Beijing has agreed to step up its purchases of U.S. farm products and other goods.

“This was telegraphed well enough that the market is kind of looking through it and toward the next phase and what that means,” said Keith Buchanan, portfolio manager at Globalt Investments.

Health care stocks accounted for much of the market’s gains. Utilities and makers of household goods also rose. Those gains outweighed losses in financial stocks, companies that rely on consumer spending and the energy sector.

The S&P 500 index rose 6.14 points, or 0.2%, to 3,289.29. The index also climbed to an all-time high on Monday.

The Dow gained 90.55 points, or 0.3%, to 29,030.22. The Nasdaq composite added 7.37 points, or 0.1%, to 9,258.70.

Smaller-company stocks fared better than the rest of the market. The Russell 2000 picked up 6.66 points, or 0-4%, to 1,682.40.

The benchmark S&P 500 index is on track for its second straight weekly gain.

Bond prices rose. The yield on the 10-year Treasury note fell to 1.78% from 1.81% late Tuesday.

While limited in its scope, investors have welcomed the U.S.-China deal in hopes that it will prevent further escalation in the 18-month long trade conflict that has slowed global growth, hurt American manufacturers and weighed on the Chinese economy. The world’s two largest economies will now have to deal with more contentious trade issues as they move ahead with negotiations. And punitive tariffs will remain on about $360 billion in Chinese goods as talks continue.

With the “Phase 1” agreement now a done deal, investors have more reason to focus on the rollout of corporate earnings reports over the next few weeks. Earnings have been flat to down for the last three quarters, and if the fourth quarter meets expectations, it should be around the same.

However, analysts are projecting 2020 corporate earnings growth to jump around 9.5%, which is why traders will be listening this earnings reporting season for any clues management teams give about their business prospects in coming months.

“We’re expecting a reacceleration in the back end of the year, so any (company) guidance that brings any type of skepticism to that could threaten the recent rally we’ve had and the gains that we’ve accrued in the past few months,” Buchanan said.

Health care stocks powered much of the market’s gains Wednesday. Several health insurers climbed as investors cheered a solid fourth-quarter earnings report from UnitedHealth Group.

The nation’s largest health insurer, which covers more than 49 million people, said its revenue rose 4% on a mix of insurance premiums and growth from urgent care and surgery centers. Its stock rose 2.8%. Other health insurers also moved higher. Anthem gained 1.6%, Cigna added 1.5% and Humana climbed 1.9%.

Technology companies also rose. The sector is reliant on China for sales and supply chains and benefits from better trade relations. Microsoft gained 0.7% and Advanced Micro Devices gained 0.8%.

Utilities and consumer staples sector stocks also notched gains. Edison International climbed 2.5% and PepsiCo rose 1.7%.

Financial stocks fell the most. Bank of America slid 1.8% after reporting weaker profits due to the rapid decline of interest rates in late 2019.

Energy stocks also fell along with the price of crude oil. Valero Energy dropped 3.3%.

Homebuilders marched broadly higher on news that U.S. home loan applications surged 30.2% last week from a week earlier. The pickup in mortgage applications reflects heightened demand for homes and suggests many buyers are eager to purchase a home now, rather than waiting for the traditional late-February start of the spring homebuying season. Hovnanian Enterprises jumped 6.4%.

Target slumped 6.6% after a disappointing holiday shopping season prompted the retailer to cut its forecast for a key sales measure in the fourth quarter. The company said weak sales of electronics, toys and home goods crimped sales growth to just 1.4% in November and December.

Benchmark crude oil fell 42 cents to settle at $57.81 a barrel. Brent crude oil, the international standard, dropped 49 cents to close at $64 a barrel.

Wholesale gasoline fell 1 cent to $1.64 per gallon. Heating oil declined 3 cents to $1.88 per gallon. Natural gas fell 7 cents to $2.12 per 1,000 cubic feet.

Gold rose $9.70 to $1,552.10 per ounce, silver rose 25 cents to $17.92 per ounce and copper fell 1 cent to $2.87 per pound.

The dollar fell to 109.91 Japanese yen from 110.00 yen on Tuesday. The euro strengthened to $1.1150 from $1.1128.

Markets in Europe closed mostly lower.

AP Business Writer Damian J. Troise contributed.

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Economy

Stocks Rally Despite Impeachment News

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Stocks rose on Thursday as investors looked past the news of President Donald Trump’s impeachment as well as mixed U.S. economic data.

The Dow Jones Industrials advanced 53.85 points to begin trading at 28.293.13

The S&P 500 recovered 4.93 points to 3,196.07

The NASDAQ added 19.39 points to Wednesday’s all-time record, at 8,847.12.

The S&P 500 is up nearly 7% since House Speaker Nancy Pelosi launched a formal impeachment inquiry in September.

Cisco Systems was the best-performing Dow component, rising 1.6%. The consumer staples and real estate sectors led the S&P 500 higher, gaining 0.4% each. Micron Technology shares also contributed to Thursday’s move higher. Conagra shares surged more than 14% and were on pace for their biggest one-day gain since Oct. 16, 1989.

Micron shares climbed 3.5% on the back of strong quarterly results. The chipmaker posted earnings per share and revenue that topped analyst expectations.

On the economic data front, weekly jobless claims fell to 234,000 from 252,000 the week before. However, economists expected claims to fall to 225,000.

Meanwhile, the Philadelphia Federal Reserve’s business conditions index fell to 0.3 in December from 10.4 in the previous month. Economists expected the index to slip to 8.

The Democrat-led House of Representatives voted Wednesday to impeach Trump for abuse of power and obstruction of Congress. Trump became only the third president to be charged with high crimes and misdemeanors and will now face a trial in the Republican-controlled Senate.

Prices for the 10-Year U.S. Treasury were lower, raising yields to 1.94% from Wednesday’s 1.93%. Treasury prices and yields move in opposite directions.

Oil prices gained seven cents to $61.00 U.S. a barrel.

Gold prices moved forward $1.80 at $1,480.50 U.S. an ounce. Copyright © 2019 Baystreet.ca Media Corp. All rights reserved.

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