Michael Carlin

Hi this is Michael Carlin president of Henry+Horne Wealth Management with your manage the funds podcast. What we’re looking to do is we’re gonna try to spend about 10 minutes. No promises. For those regular listeners you know sometimes I can talk. We have got to unpack and go through the China tariff trade situation that we’re dealing with. We’ve got to go through it for a variety of reasons because there’s a lot of confusion. I talked to a business owner today and the business owner said that the China trade deal and the resulting tariff I know it’s increased the price in the cost for him to do business.

The China tariff he has to deal with steel in the end. In the cost for his steel went up which means that they make less money on the things that they were doing and it was countries said that goes it is the best thing that’s ever happened to me in my business career and as well. So what happened. He said Well there’s a whole bunch of other companies that were competing with us in this increased cost make sure that the cream rises to the top. And as a result some of our competitors have gone away.

So this underscores the point of one obviously if you’re a great organization you can navigate difficult times and tariffs and things like that that happen to your business too. It also underscores the fact that it’s a real thing and it does impact American businesses. So let’s kind of set the stage and what what has gone on with this tariff you may recall 2018. Well you may not recall but let’s just kind of get the big picture is in 2018. We did five hundred and forty billion dollars of business with China included in that are semiconductors auto parts steel sneakers laptops.

Think about it. You know all the things that we’re getting from China over that same time period in 2018 we sold to China about one hundred and twenty billion dollars worth of stuff. So about a fifth of what we’re sending them a fifth of what we’re consuming this gets lost. We’re consuming more from China than we’re sending them because we’re consuming here in the United States more than we can produce. We’ve got to get it from somewhere. We’ve got to get the stuff from somewhere because we can’t produce enough of it at the right cost.

So we have to get from China. So there’s there’s this trade imbalance which we’re you know where we’re many say well they should be buying 540 billion dollars worth of stuff from us. Well that’s not really how it works where we’re consuming more. We need to get it from somewhere so China’s a great place to get it specifically because of the costs.

Well in 2018 the US imposed tariffs of 10 percent on two hundred and fifty billion of the five hundred and forty billion dollars of Chinese goods that we are consuming.

And then we ended up raising the tariff to 25 percent in August of 2019 Trump announced an additional new 10 percent tariffs on three hundred billion dollars of goods. Some of those goods were exempted till later in the year and there are plans that they want to have a duty of 25 percent if the two sides fail to reach a deal. So. The administration’s objective was to put a again a pretty massive tariff on all Chinese goods coming into the country so you also look at what China. China didn’t just you know do nothing.

They retaliated and they put tariffs on what they were importing from us. We’re going to talk a little bit more about what that was but that was that net retaliatory tariff. It looks like it will hurt our exports to China by about 18 percent or maybe as much as 22 billion dollars this year alone less goods potentially sold to China because they tariff our stuff.

We’ll talk about what those what that stuff was and really what this means for you as an investor is that all American consumers were paying some portion of these tariffs in the form of higher prices you got to know that you got enough that it’s it’s not it’s not just happening in a vacuum.

Now in some cases maybe a business can absorb the kid. It may not just mark up the price of their product exactly what the tariff was but the business is paying for some of it in the form of lower profits because they’re absorbing some of it and consumers are paying it is well so you know when you’re when you’re looking at how this thing starts to come together.

We got to at least examine first how are the countries going to withstand this whole thing. So China’s total economy is 14 trillion dollars they’re growing. The growth numbers that they’ve projected are six point two percent for the year.

And if you look at what a 55 billion dollar loss which is what we’re what we’re because we’re getting we’re doing less business with China to the tune of fifty five billion that 55 billion dollar loss for an economy of 14 trillion means that they’re growing at six point two percent. But if they didn’t have that loss of business they would have been growing at six point six. Step back for a minute. Growing at six anything and growing at 6 percent is outstanding albeit for China that’s slower than it has been. It’s still outstanding and for them to be growing at six point two when they could’ve been growing at six point six isn’t a disaster.

It’s not a disaster. It’s not great doesn’t mean that the economic world and China completely falls folds up. But let’s just look at it for what it is. It’s a loss and they can you know they have an ability to absorb it. So you know sometimes when you hear the Trump administration saying well wow you know what this is we know we’re we’re crushing them we’re going to you know what. Let’s kind of look at it for what it is the data suggests that you know they’re growing less. It’s OK.

They’re not folding up shop. So it’s a little bit more about the impact. So it’s interesting to note that every time there’s a major announcement or speech about you know this trade deal with China the market goes down because it’s typically been negative. You know the Trump speech at Davos being the first the Pence China Cold War speech being another the trade talks breaking down in May of 2019 the truck tariffs escalated in the middle of 2019 and then here just yet again in December we have another couple of really rough days because there’s fear that these trade talks are breaking down.

So one of the big impacts is is that it the trade talks impact the stock market because there is fear and anxiety that that this trade deal is going to get worse and it’s going to hurt business is going to hurt consumers. But the purpose for this podcast is to explain what’s going on then and look at the data and see is that even true. Is that really what’s happening. If you look at if you look at things like you know there’s these ESM indexes and essentially what it is is it will measure how much the U.S. economy is growing for both manufacturing in the non manufacturing or services part of the economy.

And it’s hard to mistake the fact that both of those growth measures or measures of the economy they’ve been growing less and in fact they’re manufacturing part of the U.S. economy is in contraction so some say the manufacturing side is in contraction because of these tariffs but if you look from historical context manufacturing goes through cycles in this really feels like a cycle where again you produce too much then you got to produce less and then you run out of inventory and then you’ve got to produce more and then manufacturing goes up.

It is a cyclical thing. So I don’t know if there’s necessarily a direct tie between the Manufacturing Index going down and the tariffs. You also look at the services part of the economy which is 80 percent of our economy in the Great of growth for the services part of the economy has been slowing too. It’s still expanding but expanding less quickly what that essentially means is that again 80 percent of our economy still growing the economy still moving forward. So can you relate the tariffs to the kind of a slowing PMI numbers or these things are slowing.

Yet PMI numbers on both you know with regards to the ISDN manufacturing and on manufacturing. And the answer is it’s it’s not directly conclusive and it can if you look at China’s strategy here they’re looking at 55 billion dollars less business with the United States which hurts their economy. But how much of that really impact them because a lot of the goods that we’re talking about are built not just in China but they’re built in in Japan and in Vietnam and Canada at all and sometimes they’re assembled in China. And if you look at the real cost to China doesn’t appear to be fifty million it appears to be about half that about 20 billion and you know when you’re when you’re looking at what China did with their tariffs they went in with a really weird kind of went with it or you know across the board approach.

They went very targeted. You know some some economists I’ve read said that they that these a scalpel in what they did is they slapped tariffs on soybeans 28 percent tariff on soybeans I’m looking at 23 percent on wood and paper and metal products and chemicals so they increase the tariffs on those kinds of things. And then at the same time they lowered the tariffs on those same products from other countries from 8 percent to six point seven percent increase the ones in the United States on certain products and then decreased other parts of the world so they could import them cheaper from other parts of the world in there.

The types of things that are really replaceable wooden paper and metal and based chemicals you can get those from other places in the result.

Because the way China handled their tariffs they’re not paying a heck of a lot more for soybeans and chemicals and other products and because they’ve handled the tariff in this way by tariff in the U.S. and and by decreasing the tariff and others there’s there’s kind of there’s no deadweight cost. That’s what they refer to as deadweight costs. They’re referring to you know how much of the consumers have to pick up and the answer is in China on those kind of products. Not not much or anything on the other hand the tariffs that we’re you know we’ve got in place and we’re looking to have a 25 percent across the board American families will definitely pay more for it.

You know for sneakers and circuit boards and farming equipment you name it.

And so the Treasury you know they recoup an equivalent amount of in tax revenue via that via these tariffs and then the money. The thought is going to be that a lot of the money that we are taking in in tariffs we are then rebating to the farmers in those we’re getting hurt because they’re selling less to China.

So you can’t even say that like Geez all the tariff money is coming in and it’s great and it’s going into our coffers. We are having to subsidize some some some industries which is challenging. And in addition there’s going to be higher costs for imports here in the United States.

And so there will be some kind of a dead weight cost here so economists and again eat what you can do is you can lean on good data driven economists that that hopefully do great homework they they did estimate that the annual cost per household was six hundred forty bucks a year and what that means is is that we’re all paying 640 dollars a year for things that we’re using and throughout the course of the year because we’re buying stuff that inevitably comes from China and some of those prices have increased how much to the tune of 640 and that’s depends upon what you’re accumulating what you’re buying what you’re using that’s a total of 80 billion dollars that is that is to six hundred forty bucks per household.

The harder part to digest is that if indeed we do go forward with these tariffs of 25 percent across the board. Look at the projections for 2020 here’s where the rubber hits the road. Here’s what the market’s worried about.

This is it that 80 billion dollar deadweight costs is expected to rise to 160 billion and that 160 billion you know you’re talking about again about almost 13 hundred bucks per household is what it would cost in addition to consume Chinese goods your goods that we’re importing from China and if you’re looking at an economy we’re hoping next year we’re going to expand by 390 billion is kind of what we are hoping our economy would grow by some not quite 400 billion to have 160 billion dollar cost would be crazy because that costs us nine tenths of one percent or almost one percent of GDP.

Whoa whoa wait a minute. We were a good year for us is growing at 3 percent and we’re going to lose point 9 by paying higher costs from tariffs that Pat.

That’s that’s crazy. So again if you’re kind of looking at the scorecard because there’s no deadweight cost from China in yes we are doing less business with them they’re looking to lose about four tenths of one percent for their GDP.

And if you look at where our lost exports work is I mean again we’re exporting less but we’d still lose some. And then you add to that the deadweight cost that we just talked about that that’s about 1 percent GDP. So now we understand with data the trade deal.

Certainly has a big potential U.S. economic impact. So we have this ridiculous cycle that happens where the administration looks at the stock market that’s high and they feel good and they feel strong. This is working and then they get tough on China and they say you know I don’t know if I feel a trade deal coming. I don’t like the way things are going the market goes down and then over a period of time at some point we’ll get some good news that the trade deal looks good. And then the market goes up and the new administration feels strong as the markets up and says You know I don’t know if a trade deal is gonna go through or the market goes down.

And hence the new and then the cycle continues. The good news is is that the amount that the market is going down is reducing. Meaning the markets caring a little bit less and a little bit less about this but it’s gone on for a long time. So if we don’t end up getting a trade deal and we do end up having these tariffs come into play now you’ve got the data that that will tell you some industries impacted more than others. Some consumers impacted more than others but this could be potentially a real challenging thing.

So hopefully what we do see is we see some type of a Phase One deal which right now the markets I believe counting on in this phase one deal will hopefully lead to additional deals where we can see great reconciliation with intellectual property rights to guaranteed payments for our farmers in terms of guaranteed amount that they’ll be consuming and all kinds of other great things that hopefully at the end end end of the day will create a even more confident business environment that will lead to higher prosperity. If you have any questions about anything that was in this podcast send us an e-mail give us a call.

You can always find us at manage the funds on social media. You can always direct messages Direct Message us there you can give us a call find us on the web at h h dash w m dot com. That’s it for today. Take care and have a good one.