Trump's Trade War Brings Out the Worst in Investors

(Bloomberg Opinion) -- Investors’ math on President Donald Trump’s proposed new tariffs appears to be one plus one equals roughly 4.

Stocks struggled to stay positive on Wednesday after shares of the companies in the S&P 500 Index lost some $528 billion in total market value the prior two days following Trump’s weekend threat to increase tariffs on Chinese goods instead of striking a trade deal with the Asian economic giant. Chinese officials said they would retaliate with their own tariffs on U.S. imports.

Trump's Trade War Brings Out the Worst in Investors

That stocks didn’t fall further Wednesday appeared to be the result of investors clinging to the belief that a deal will still be struck, which could be the case. Chinese trade negotiators were expected in Washington on Thursday. Bank of America Corp. sent out a note to its clients on Wednesday morning that said the “baseline view” of their strategy team is that there will be a trade deal between China and the U.S. sooner rather than later. The same day, JPMorgan Chase & Co. CEO Jamie Dimon told Bloomberg Television he put the chance of a deal at 80%. Trump’s weekend bluster could have just been a bit of last-minute, though probably ill-advised, hardball.

Perhaps. But Goldman Sachs Group Inc. strategists signaled later on Wednesday that they thought the possibility of no deal was real. Either way, maybe investors should focus less on whether a deal gets done and more on how much damage tariffs could do to a U.S. economy that, based on the most recent jobs report, still seems to be humming along quite well. Have they overestimated the damage? 

Trump tweeted over the weekend that he may raise existing tariffs on $200 billion of Chinese goods to 25% from 10% as soon as Friday, and extend these levies to all other Chinese imports, amounting to an additional $325 billion in goods a year. Add that together and you get an economic hit of $111 billion, assuming the added cost is passed along completely to consumers. Chinese producers may cut their prices somewhat to mitigate the sting for shoppers, and consumers could shift their buying habits. But other producers, even domestic ones, might raise their prices to profit from tariffs. The bottom line is that costs to consumers will likely rise, so let’s go with that $111 billion.

Trump's Trade War Brings Out the Worst in Investors

This baseline calculation ignores some of the knock-on impacts of the tariffs. There are other goods that aren’t subject to the levies, but manufactures raise their prices anyway, as has been the case with clothes dryers. While dryers aren’t subject to the current tariffs, washers are, and since the appliances tend to be sold together, both have seen price increases. Economic studies released in March found that consumer prices have risen $69 billion due to the tariffs overall. Trade Partnership Worldwide, a free-trade advocate, says tariffs will cost the average American household roughly $750 a year, or about $95 billion in total. Then there’s the tariffs China will likely impose on U.S. products in retaliation. China imports $130 billion worth of U.S. goods. A tariff on those products of 25% would represent a hit of $33 billion for U.S. manufactures, assuming they swallowed the whole thing.

Putting this together isn’t easy. Some of these economic effects will overlap, and some will amplify. Oxford Economics estimated that the tariffs would directly cut this year’s GDP growth by 0.3 percent, which equates to a $58 billion hit to the U.S. economy. But add the worse-case cost to American consumers and the worst-case cost to American producers and you get a figure of an economic hit of about $128 billion. That’s still a good deal less than the $528 billion in market value that this week’s plunge was erased. Nor is it that much in a $19 trillion U.S. economy.

Of course, that’s just the one-year impact. Farther out, tariffs could do some real damage. The largest U.S. companies in the S&P 500 get about half their revenue from overseas these days. If the China trade tiff erupts into a multi-front war with all of our trading partners, as it appeared to be doing last year, than those sales, and the expected double-digit earnings growth of companies in the S&P 500, say two years from now, would be in jeopardy. But presumably the point of tariffs is to get us to a better trading situation with other nations, at which point they could be lifted – not to do long-term damage. That may indeed be what happens, but investors have already jumped to the conclusion that the impact of the tariffs will be worse than what is arguably the worst-case scenario. Trade negotiations may yet heat up, but cooler market heads should prevail. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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