In the last few days, President Donald Trump has been stepping up the rhetoric on trade tariffs. He has threatened tariffs on an additional $200 billion of Chinese goods, and said the US would impose tariffs on car imports if the European Union didn’t remove its tariffs on US vehicles.
This has made the markets very jittery. Tariffs of this scale would certainly have an impact on global economic growth and company profits.
However, speaking at the Sasfin Wealth ‘Beyond Global Wealth’ seminar in Cape Town on Tuesday, UBS Wealth Management’s global chief economist, Paul Donovan, said he doesn’t believe there will be a major trade disruption. His expectation is that the major parties involved in the current dispute will instead come to a negotiated solution.
A deliberate policy
He pointed out that one has to consider how Trump has approached the issue.
“The tariffs we have seen so far have been very cleverly applied by the US president,” Donovan argued. “They are largely invisible and economically very limited in their impact.”
For instance, the US has imposed tariffs on washing machines. Almost all of these appliances sold in the US are imported, so one might think this would have a significant and noticeable impact, but Donovan believes this isn’t the case.
“The American consumer doesn’t see a price increase because if you are buying a washing machine today, the last time you bought a washing machine was 10 or 15 years ago,” he pointed out. “You are not going to go back through 10 or 15 years of credit card slips to find out what you paid, so you aren’t really aware of changes in washing machine prices.”
The Budweiser effect
The tariffs on steel and aluminium are similar. The average consumer doesn’t ever buy these products in their raw form, so there is no direct impact.
They do however buy products that use steel or aluminium, and so one might expect to see the effects coming out down the line. Donovan suggested that these impacts will however be very small.
Budweiser, for instance, announced that because of the aluminium tariffs, it would have to increase the price of a can of beer. This is something one might expect US consumers to notice, but Donovan believes it will be negligible.
“The average price of a six pack of Budweiser is $9.50,” he said. “With the aluminium tax, it becomes $9.56. That could be absorbed by retailers or wholesalers, but even if it is passed on, you’re not going to notice six cents.”
He believes the tariffs that have been imposed so far are therefore “largely invisible” to the US consumer.
“This is great from Trump’s perspective because he gets his five minutes on Fox [News] surrounded by cheering steel workers, but the US public doesn’t realise that it is ultimately paying for it,” Donovan said. “From a political perspective he gets all the positive visuals without the realisation of the cost.”
But if Trump starts to impose further tariffs, Donovan believes the US consumer would start to feel it.
“If you put a 25% tariff on Nike shoes, the US would notice,” he said. “If there is a 25% tariff on iPhones, there would be riots in Seattle. The tariffs on $50 billion of Chinese goods that he just announced are the last he can impose without the consumer noticing. And of course the consumer is the voter, and that then becomes a problem because voters will notice the cost of the tariff policy and start to reject it at the ballot box.”
So far, Trump has gained a lot of positive sentiment from his approach on tariffs. Before the public became aware of the crisis being created by separating children from their parents on the Mexican border, the president’s approval rating was at its highest point since he took office.
The latest CNBC All-America Economic Survey found that for the first time the majority of Americans approve of Trump’s handling of the economy. His economic approval rating was up six points from March to 51%.
“My view is therefore that we won’t get a trade disruption,” Donovan said. “There will be more noise, but we won’t get a trade war.”
His one concern, however, is that there may be a disconnect between what the US thinks it is doing, and what other countries think it is doing. This may lead to a breakdown in future negotiations.
Donovan pointed out that many people in Asia, and particularly China, believe that Trump’s imposition of tariffs has nothing to do with economics. They think it is a political move by a declining American power trying to prop itself up and keep China down.
“That is potentially a problem because if you have America thinking it is negotiating an economic policy and China thinking it is a political policy, they may miss each other and we [may] tumble into conflict without realising it,” said Donovan. “That is a possibility, but our base case is that trade policy is not going to disrupt the global economy to a great extent.”