For the past year, the press has been inundated with news regarding Trump’s trade war with China. U.S tariffs against Chinese imports has caused the price of Chinese goods to grow, increasing U.S manufacturing costs and taxing U.S consumers. A prudent investor would expect the U.S economy to slow or decline as China is the U.S’s largest trade partner with a total exchange value of $636 billion according to Fortune magazine.
Interest Rate Manipulation Eases Ramifications of Tariff War
Economic growth is ominous as Trump is threatening to implement tariffs against Mexico who is apart of NAFTA. Fortunately, the Fed has strategies to circumvent possible domestic economic volatility and decline by manipulating interest rates. Amid the trade war, the 10-year treasury note traded at 2.14% “after reaching its lowest level in 20 months.” according to CNBC.
When we compare the 10-year treasury note yields pre-tariff war to present, the variance is dismal. According to CNBC, in May of 2018, the yield was 3.03%, since then, the yield has dropped by 0.89%. The trade war has had a significant role in this decline. However, by manipulating interests rates, the Fed has the ability to accelerate investments and consumer spending– creating economic growth, according to CNBC. After all the noise, the stock market is linked to economic growth and low-interest rates are the rocket fuel.
The tension between the U.S and China has eased, creating an opportunity for both President XI and Trump to discuss mutually beneficial trade policy. Recently, the Dow Jones Industrial Average and S&P 500 jumped 2.1% while the Nasdaq composite jumped 2.7%, according to CNBC. Despite ongoing trade disputes with China and Mexico, the U.S economy is achieving growth. Growth amid the trade war reveals the U.S’s ability to maintain growth with a decline in Chinese imports/goods.
Declining Relations with Mexico
Aside from the U.S easing tensions with China, President Trump has revealed interests in placing tariffs on Mexican imports. According to CNBC, Trump has agreed to place a 5% tariff on all Mexican imports beginning June 10th if Mexico doesn’t secure its border. The U.S and Mexico are apart of an FTA (Free trade agreement) that is designed to benefit both countries economically. One of the stipulations of this FTA is the elimination of tariffs and non-tariff barriers, according to trade.gov. A dispute with Mexico could lead to damaged relations and economic decline as Mexico is the U.S’s third largest trading partner with an exchange value of $557 billion. Some of the U.S’s largest corporations have manufacturing plants in Mexico such as Ford and Nestle.
Aside from labor and production, many large U.S companies rely on Mexico for sales. For example, according to CNBC, Whirlpool receives 4.1% of their total sales exposure from Mexico. Potential declines in U.S exports to Mexico due to increased tariffs may negatively affect the bottom line of U.S corporations. Absent other factors, this will inevitably lead to losses in the S&P 500 unless Jerome Powell is able to strategically manipulate (lower) interest rates to induce consumer spending and positive economic growth.
Key Provisions of NAFTA
1. Elimination of tariffs
2. Elimination of non-tariff barriers
3. Implementation of rules of origin
4. Uniform customs procedures and regulations
5. Investment Provisions
6. Free trade in services
7. Protection of intellectual property
8. Government procurement policy
9. Implementation of environmental and other standards