The Real Reason Tariffs Threaten Our Economy

announcement on tariffs

The markets plunged on President Donald Trump’s announcement on tariffs.

It’s not that the initial announcement by itself was going to derail our economy. But investors have focused on the threat of a looming trade war.

There’s another elephant in the room, though, that many seem to avoid discussing when highlighting the risks of tariffs.

And it doesn’t even require other nations to retaliate.

I’m talking about the nation’s debt.

Sitting at $20.85 trillion and climbing, it is at an astronomical level that will be a force to reckon with some day.

No one right now has a rational plan to deal with it — and that’s a problem.

What we do know is that the trickle-down effects of protectionist policies like tariffs will upend the U.S. economy as we know it.

Here’s how it works.

Announcement on Tariffs

All tariffs start with the right frame of mind: to protect jobs, and hit back at countries that are manipulating prices — either through cheap labor or other actions.

Now, many, possibly including Trump, would argue that this is exactly what the U.S. should do. That the U.S. is strong enough to stand on its own.

And that is true.

The Elephant in the Room

But this is where the elephant in the room of government debt comes up.

Tariffs do one thing for certain — increase prices.

By nature, if we charge more for countries to export us raw goods, it means final products will see price increases. Higher costs will always hit the consumer.

Higher prices lead to an increase in inflation, because inflation, by definition, is the fall in the purchasing value of money.

Inflation rises because prices are rising.

The Federal Reserve is a tool to combat inflation. One of its mandates is to keep prices relatively stable. In order to do this, the Fed is able to manipulate interest rates.

A Relationship of Opposites

Think of this relationship as opposites.

To subdue inflation, the Fed will raise rates. With lower interest rates, the Fed is trying to spark inflation.

Right now, the Fed is in the middle of an interest-rate hike cycle. It is doing this because it sees inflationary pressures in the market.

The problem comes if we follow through with tariffs.

With those inflationary pressures that are already present, like an economy at full employment that just got a tax cut, we’ll see higher prices for practically every good we use.

The Fed’s response will be to increase rates higher and more quickly.

So, what’s so bad about higher interest rates?

Our debt.

The Repercussions of Tariffs

The government’s more than $20 trillion in debt is rolled over every three to four years to new bonds. That means what was once locked in near-zero interest rates will now be rolled into higher rates. This means the U.S. government will begin paying much, much more for its debt obligations.

It currently pays about $223 billion in interest payments — which is a substantial amount.

But if interest rates continue to climb, and get back to a level that was considered normal for the last three decades, we’ll find ourselves paying $825 billion in interest by 2020. That’s more than the recently boosted defense spending of $700 billion, about the same as Social Security obligations and half the amount of all personal income taxes the government receives in a year.

These are mind-blowing statistics.

And this is a rational expectation.

It likely will be worse.

This isn’t a hidden risk, either. Trump knows the repercussions of broad tariffs, and I think the original announcement will get tweaked drastically before it is signed.

Trump’s Greatest Asset

Trump, I hope, uses his business instincts to leverage the greatest asset he has ever had — the U.S. economy.

He is going to look to scare other countries by coming off as serious about tariffs, and use that leverage to push those countries into better trade deals.

That is a positive outcome from all of this.

If no one negotiates with him, though, and Trump follows through with steep, broad-reaching tariffs, other countries will retaliate, and the markets will remain volatile.

A sell-off on the news is likely, but then stocks will rebound.

The rebound will come as there isn’t a change in the data from the tariffs for a while. The tariffs have to find their way through fixed contracts and such before we see prices rise.

But once the data starts to show a rise in prices is hitting the economy, likely a year or so after the tariffs, that’s when the real panic will set in.

I’ll let you know to get out long before then if that is the case.

For now, let’s wait and see where the dust settles.

Regards,

Chad Shoop, CMT

Editor, Automatic Profits Alert

25 comments

Trumps tariffs are actually the retaliatory response to others tariffs. The other countries have a choice to reduce tariffs and thus reduce costs for all. The ******** is from the folks saying fabricators will lose jobs at the expense steel workers gain. It won’t happen that way because countries will adjust their tariffs down to avoid the 25% Trump has started!

Basic economics 101; Tariffs result in inflation,which then triggers high interest rates. As for China being punished,that wont happen since Chinas steel imports account for ONLY 2%.Canadas is 18%, EU 21%, S Korea 10%. So those tariffs wont hurt China at all,or result in better trade deal for the US. For someone with an MBA from Whartons, Trump is clueless about how the economy works or any other thing having to do with finances,thats apparent by excessive bankruptcy filings and his low net worth in comparison to say Warren Buffet,or Jeff Bezos. Trump wasn’t even in the TOP FIVE of US Billionaires….let that sink in…So Canada gets an exemption and Mexico form Tarrifs , so what? still wont impact China. What this misguided policy shift will do is shortchange American workers that work in small local businesses making steel parts etc.thats in every state in the US….that’s a potential loss of over 160,000 jobs for a short gain of 60,000? Not a very good deal at all. Hurrah for the Steel unions.. Also inflation,that impacts the average Joe and Josephine’s cost of living. Thats called a TRADE TARRIFF WAR ,retaliation for making it difficult on trading partners..Goods and commodities will increase in price ,down to your Coors beer. Interest rates will go up….This may also spark a major recession,..anyone with a clue should be concerned… and invest accordingly..Money in the bank would be good ,since interest rates will hike up..Dont invest in any steel or aluminum stocks though..

‘These American companies could be hurt by Trump’s tariffs’
by Julia Horowitz @juliakhorowitz March 9, 2018: 11:14 AM ET Anheuser-Busch
The aluminum used in beer cans is expected to get more expensive once the tariffs go into effect. Anheuser-Busch (BUD) has warned that it could threaten manufacturing jobs in the industry.

The company employes more than 18,000 people in the United States.

Auto parts manufacturers

The Motor & Equipment Manufacturers Association, which represents companies that make vehicle parts in the United States, has said the tariffs will make cars more expensive and could put the many of the more than 800,000 jobs in its industry at risk.

Boeing

The nation’s largest single exporter uses aluminum and some steel parts to make planes. Boeing (BA) could also suffer if other countries decide to retaliate against US tariffs by buying planes from competitors like Airbus. The company has more than 140,000 employees in the United States and around the world.

Caterpillar

Making Caterpillar (CAT) construction equipment could get more expensive if steel and aluminum prices rise.

The company employs more than 98,000 full-time workers around the world. About 42,000 are in the United States.

Campbell Soup Company

Commerce Secretary Wilbur Ross has said that there’s 2.6 cents worth of steel in a can of Campbell’s soup, and consumers can expect prices to rise less than one cent as a result of tariffs. Campbell’s (CPB) responded that “any new broad-based tariffs on imported tin plate steel — an insufficient amount of which is produced in the U.S. — will result in higher prices on one of the safest and more affordable parts of the food supply.”

Campbell’s has about 18,000 employees.

Craft breweries

Craft breweries, which have been a breakout success over the past few years, worry that future growth will be stunted if beer cans get more expensive due to higher aluminum prices. Oskar Blues, a Colorado-based brewery with operations in North Carolina and Texas, said tariffs would put “a strain on the business.”

DowDuPont

An executive at the chemical company told Bloomberg that it might need to start building plants in Canada or Argentina if the cost of construction goes up too much in the United States.

DowDuPont (DWDP) has approximately 98,000 employees.

Ford

Ford (F) uses steel and aluminum in car production. Ford said in a statement that the tariffs “could result in an increase in domestic commodity prices — harming the competitiveness of American manufacturers,” though it mostly uses American-made steel and aluminum in vehicles manufactured in the United States.

Ford has about 202,000 employees worldwide.

General Electric

GE (GE) makes jet engines, power plant turbines, trains and other heavy machinery, all of which use steel and aluminum. Higher costs could inflict further damage on a company that already faces serious financial troubles. GE said in a statement that it’s monitoring the situation but expects the impact to be “minimal.”

GE has about 313,000 employees total. About 106,000 are in the United States.

General Motors

GM (GM) cars contain steel and aluminum, though the company says that more than 90% of the steel it uses to make cars in the United States comes from American suppliers.

It has more than 180,000 workers around the world.

Molson Coors

The maker of Coors Light and Miller Light has said that it makes an “increasing” number of beers in aluminum cans. Rising prices will “likely to lead to job losses across the beer industry,” the company said on Twitter.

The company has 17,200 employees globally, about 7,900 of which are in the United States.

Oil companies

Members of the oil industry have warned that Trump’s steel tariffs could derail the country’s energy boom by raising prices on foreign steel, which oil companies use in drilling and production, as well as in pipelines and refineries.

Canary LLC, a Denver-based oilfield services company that employs about 300 people, said higher costs could force it to lay off up to 17% of its US workers.

Whirlpool

Whirlpool (WHR) recently got a boost when Trump slapped tariffs on imported washing machines. Now it could get more expensive to make household appliances like dryers and refrigerators in the United States as metal costs rise.

Whirlpool has about 92,000 employees.

CNNMoney (New York) First published March 8, 2018: 3:34 PM ET

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For example,if the target is China,then Trump should be effecting a trade policy that specifically addresses China and Chinas dumping of goods on the US market,specifically a tax on Chinese goods,to rebalance the trade deficit, . Not a sweeping tarriff on steel and aluminum that impacts every foreign entity but China.

You can’t single out just one Country. Take a course in Economics 101. Century Aluminum in Kentucky just announced that they are spending 100 million dollars to expand their Aluminum Plant. Don’t you think that that will require more hiring of employees??? Since Trump announced the Washing Machine Tariffs there is at least one foreign Country that is building a Plant here in the U,S, They will hire American workers. Amazing that you don;t mind the heavy tax on Beer but whine about a penny increase in an aluminum can. The 100 million expansion of the Aluminum Plant will take care of that. I suppose you don’t mind the Federal, Local and State tax on Gasoline. Are you going to stop driving a car?I doubt it as you apparently don;t mind the heavy tax on Beer. Politicians love increasing the “Sin Tax” on Alcohol and Cigarettes and it is heavy. But you don’t mind paying it and then whining about a penny tariff on a can of Coors. Coors does make Beer in bottles if you can’t pay the penny. This will also result in an extra $175. for Autos. Not everybody can pay cash and finance over 5 years pr $35.00 a year and less than $3 dollars a month. People spend more than that at Starbucks every month. You need to take a course in Econ 101. How about getting your facts straight.

What is your fascination with Coors beer? I am familiar with Busch, The average person can’t get employment with them unless they belong to the Union. People will adjust their buying habits , The taxes on alcohol and cigarettes is huge. Don’t see you complaining about them.Wake up. They also sell beer in bottles. Amazing. You don’t mind the huge taxes on beer but object to paying a few cents more for an aluminum can????. . If companies make the parts in the U.S. there is no Tariff. . We will raise the Tariffs on Foreign cars and people will buy more American cars. How about a 100% Tariff? India puts a 100% Tariff on Harley Davidson Motorcycles. How about Fair Trade?Take a course in Econ 101

I stopped reading at the definition of “inflation.” “Inflation” is what one does to tires, balloons, bubbles, air mattresses, and the money supply. It doesn’t make any sense to say one inflates a price which is always a negotiation between individuals.

Rising prices are caused by supply and demand changes, cost increases (monetary and regulatory, including tariffs), the weather, emotions, fads, and stupid political actions or manipulations, and the Fed. Inflation is only one of many possible causes of rising prices. Inflation happens before the price rises. “Inflation” is not a word that describes the result, it is a word that describes the action of increasing the money (or, rather, “currency”) supply. Price increases will probably follow.

It seems to me that our trading partners are a lot closer to the edge of the cliff than we are. They will go over before

we do. Trump expects them to be a little more reasonable.

Well, the countries in Europe has castrated themselves with their open borders policy’s as well. How much thought went into that? If the U.S. cannot meet it’s considerable worldwide obligations the effect will be felt around the globe. It is NOT in the worlds best interest to raise prices on anything they sell in the U.S. Our national debt is a disgrace but, it may be propping the entire world up at present and Mr. Trump can do no wrong. He is the ONLY person in recent memory to at least TRY to do something.

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