US hikes tariffs on $200 billion of Chinese goods to 25% overnight, from 10%, and China vows to retaliate. How will the latest escalation impact the likelihood of an eventual trade deal? And what could that mean for economic growth around the world? Kim Parlee speaks with Fotios Raptis, Senior Economist, TD Bank Group.
- If we start with what happened today-- of course, open tariffs on Chinese goods coming into the States on about $200 billion of goods. President Trump has followed through with his threat to increase that 10% to 25%, and not good news, I think, for a lot of people who want to see free trade.
Um, you put out a report talking about how this is going to impact Canadian, US, and global economies. And you talk about the direct income and confidence and wealth effects.
- First channel is obviously the direct effects. And that's the import disruption, potentially supply chain disruptions. And they're generally tend to be small because there are some substitutes for a lot of goods. And in general, firms will just absorb a lot of the price increase, or pass them on. So the actual supply chain disruption tends to be quite small.
The second effect is the price and income effect. So as firms start passing on these prices to the end users, the negative economic impacts are to build 'cause the consumers and firms no longer have the same amount of income that they had before to spend on other goods and service because their core consumption basket starts rising in price and become more expensive. So that starts weighing on economy more.
And the last one is very hard to forecast and estimate. And that's the confidence and wealth effect. So that's the fact that all of a sudden, you have the escalation in trade tariffs, which leads to further uncertainty, in terms of business planning and consumer planning decisions as well, in terms of maybe, oh, does this mean my job's at risk if the plant that I'm working at sees our costs rise?
So that uncertainty starts weighing a bit on decision-making on major purchases and investment on the business side of things. They have, of course, stock market effects. And that's really what the wealth effect is. We've seen the stocks sell off this week as a result of this. And that eventually will bite as the market reevaluates the earnings potential of firms, due to the fact that they have rising input costs.
- What I thought was interesting as well is you actually went in and quantified what this is going to mean for GDP numbers. Because of the tariffs, you have the impact on US GDP, just the change today, 0.14%. And that's annualized on GDP.
- So that's kind of small. And again, the reason for that is we don't think that it was a big shock as markets have made it out to be. So in terms of the income effect itself, it's little disruption. Income effect will be there. That's largely what this reflects, as well as the potential confidence and that stock market effect.
- And you have a look at China, equal, 0.12%, or close.
- Roughly, yeah, it's roughly the same type of disruption that we anticipate. They're a little bit limited in terms of the retaliation. So that's why-- but at the same time, they also have a lot of leverage to use to offset.
- The one thing that this audience is probably even more concerned with is the 0.12% for Canada. And is that just because US demand goes down just as we get hit by that?
- That's exactly what that is. That's a pure reflection of the fact that it's a shock to the US economy. So less demand means it's going to be roughly about 0.1.
- The other numbers that are there are a little more concerning-- not that those ones aren't-- are-- you took a look at what would happen if you had a 25% tariff on the balance of Chinese goods coming into the States. And then you've got 0.28, almost 0.3, decrease in GDP in the States, 0.2 in China, and 0.14 in Canada.
Again, you have to look at it. Do you think that's a high probability of happening, or this just depends on how the trade talks go?
- Yeah, we should be concerned that this could escalate and could result in much larger impacts, and even we hadn't anticipated and estimated.
- Last question for you. I mean, given everything that's going on, what are you going to be watching over the next little while to understand, I guess, whether that probability is increasing, or what other indicators you're going be watching to make sure that how things are going.
- Definitely looking at what happens in terms of the trade side. So trade data is coming out on a monthly basis. So that'll be a key indicator between the US and China, see how that plays out.
And also just looking in general at sentiment indicators, so things like Purchasing Managers' Indexes and ISM in the US. This gives us a kind of a leading indicator in terms of the sentiment overall and reaction, business reaction, to these new tariffs.
- And what will you be looking at within those ISM? What are you looking--
- If we see further deceleration in manufacturing activity, particularly in the US, dropping export orders, and things like that. So--
- Fotios, thanks very much.
- Oh, welcome.