Discussion: (0 comments)
There are no comments available.
A public policy blog from AEI
More options: Share,
US-China trade will not save or damn the stock market. Stop saying that.
Markets respond quickly, right? Here are the main US-China trade events of the past four months and the reaction of the S&P 500.
1) September 17: 10% tariffs on $200 billion of Chinese goods are announced after hours. The S&P 500 rises mildly the next day and again September 19. But perhaps tariffs were priced in.
2) November 1: the (correct) story breaks that President Trump has flipped from preferring tariffs to preferring a deal. The S&P closes lower November 2, then returns to its previous level the next trading day. Effectively no response.
3) December 2: the US and China lay out a roadmap at the Buenos Aires summit. The S&P rises December 3, but more than erases the gains the next day.
That’s China to market, now market to China. The two biggest downside and upside moves since the $200-billion tariff tranche was announced have little or no connection to trade (using abcnews.go.com):
5) October 10: 95-point (3.3%) drop in the S&P. Hurricane Michael. No trade news.
6) December 4: 90-point drop. Mueller investigation top story. President Trump calls himself as “Tariff Man” but no new tariffs are even hinted and this is just a few days after the summit that postponed tariffs.
7) December 26: 116-point rise. Administration comments about the Fed. The President is in Iraq. Nothing on trade.
8) January 4: 84-point rise. The shutdown is overwhelmed by an excellent jobs report. No trade news.
These are the eight most important trading days in evaluating US-China, but only eight. Some observers may hear the daily commentary and nonetheless believe it must be the case that US-China trade moves stocks. In fact, that’s highly unlikely, because the economic impact of US trade steps has been tiny.
Harm from an exchange of tariffs should take the forms of smaller trade volume and higher prices. Neither consumer nor producer prices have budged since tariffs were implemented, nor are they projected to. American goods imports from China rose after tariffs were applied.
American goods exports to China did start falling after Chinese counter-tariffs were applied, declining at an $18-billion annual pace. That’s 1.2% of annual exports. An anti-tariff business coalition claims a $17-billion annual cost to consumers and businesses, most of which would overlap with export decline. That’s less than 0.1% of gross domestic product.
In October, the S&P lost $1.7 trillion in market capitalization, or roughly 100 times those economic losses. In December, the threat to go from 10% to 25% tariffs on the $200-billion tranche could have hurt the market. If the tariff hike had occurred, the additional economic costs can be estimated at about $30 billion.
This additional $30 billion possibility coincides with a $2.1 trillion decline in S&P market capitalization, all occurring after the January 1st tariff hike was put off at least until March 2 and possibly indefinitely.
Economic costs can wipe out much more than their value in market capitalization. But not 70-100 times more. It is not reasonable to see what are in fact minor economic changes driving such large stock movements.
This might sound like support for Trump administration trade policy. In mid-February, in the name of national security, the President may apply heavy tariffs on cars made in democratic countries which are defense treaty allies of the US.
At roughly the same time he may announce a deal with a country challenging maritime freedom, bribing foreign governments on a scale of billions, and putting hundreds of thousands of its own citizens in “re-education” camps. So, no, it’s not support for President Trump’s trade policy.
There are no comments available.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2019 American Enterprise Institute