PMC Weekly Review - September 21, 2018

A Macro View: Groundhog Day

In the classic cult comedy, “Groundhog Day,” Pittsburgh-based weatherman Phil Connors, played by Bill Murray, finds himself stuck in a time loop in the small town of Punxsutawney, Pennsylvania, forced to relive the same day over and over. Every day, he finds himself waking up to Sonny & Cher’s “I Got You Babe,” in the same bed and breakfast he stayed in the night prior, having to relive Groundhog Day endlessly. It appears that a similar situation is playing out in the global economic stage, with a seemingly unending news flow out of the United States, announcing either tariffs or the breaking of trade agreements.

Most recently, President Trump announced tariffs on $200 billion of Chinese imports on Monday to take effect on September 24. These tariffs were in response to China’s tariffs on agricultural imports from the US, which themselves were in response to his initial announcement of $50 billion in tariffs on Chinese goods. President Trump further added that if China retaliated with its own fresh round of tariffs, the US would explore applying tariffs on all goods imported from China. In this moment, we are left feeling like Phil Connors, as we replay the same story over and over. The tit-for-tat actions between the world’s two largest economies appear to be devolving into a full-blown trade war. The list of who stands to lose in the trade war is expanding from the agricultural industry, targeted by China, and businesses that import goods from China to all US consumers. The administration initially tried to shield the consumer by targeting mostly commercial imports, but the President’s most recent threat to slap tariffs on all Chinese imports suggests it could expand into broad consumer products. With looming bilateral talks between the two countries, it is hoped that the recent talk of tariffs between the two countries is bluster and negotiating tactics rather than firm plans to implement new tariffs. Oxford Economics estimates that if all Chinese imports to the US are subject to tariffs, it could slash a full percentage point off of US GDP. Considering that the Federal Reserve’s economic forecasts for 2019 range between 2.4% and 2.8%, a 1% drop is very meaningful. Despite this, US markets were stable after the most recent announcement, indicating market participants characterized the recent trade spat as bluster and negotiating tactics.

All this comes on the back of difficult renegotiation of the North American Free Trade Agreement (NAFTA). After reaching a bilateral deal with Mexico, the US threatened to abandon the NAFTA deal altogether. As the US negotiates with Canada, sticking points have stalled talks to renegotiate the trilateral deal.

It remains to be seen whether the world’s two largest economies will be able to reconcile their differences. President Trump seems dead set on leveling what the administration sees as fundamentally unfair trade and business practices out of China, going against many in his own party who see free trade as bolstering the US economy. In addition, a reworking of NAFTA appears to be making headway, but is still incomplete. With news stories regarding trade and tariffs seemingly on repeat, investors could be forgiven if they feel that they are waking up to “I Got You Babe” day after day. 

Dan Homan, CFA 
Investment Analyst

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