The Question is Why do you think tariffs backfired?

Trade-war collateral damage: the destruction of $1.7 trillion in U.S. companies' market value

Published: May 31, 2020, at 12:10 p.m. ET

ByTanner Brown

A study by theFederal Reserve Bank of New Yorkadds to previous findings that, despite pronouncements from the White House, Americans are paying and paying stiffly for the U.S.-China trade war.

Whether it was Washington, Beijing, or even a third-party country announcing its often pugnacious trade intent, U.S. businesses 'bore virtually all of the costs.'

New York Fed

The billions in tariffs hurled back and forth between Washington and Beijing have reduced the market value of U.S.-listed companies by $1.7 trillion during the 2-year-old tax offensive. The conflict will continue to weaken the investment growth rate for these businesses up to two percentage points by year's end, the study said.

The trade war is causing a financial loss for several reasons, from the inefficient pricing that taxes can create,to supply disruptions, to companies' pricey adaptations to the levies, among others. But this particular cause of losses is largely sentiment-based.

From the MarketWatch archives (December 2019): Fed study finds Trump tariffs backfired

The authors found that U.S. and Chinese trade-war policy announcements usually via press conferences or policy statements provoked sharpmarket-price declines, lowering returns on capital and investment rates.

The study model found that policy announcements lowered U.S. equity prices in a 3,000-company sample group by a total of six percentage points. Those outfits together command a $28 trillion market capitalization, so the six-percentage-point fall wiped away $1.7 trillion.

That's a vanishing of value equivalent to the national GDPs of Russia, Canada, or South Korea.

Several findings surprised economists. One was the sustained hit that stocks took from 11 specific policy announcements over the two years. But whether it was Washington, Beijing, or even a third-party country announcing its often pugnacious trade intent, U.S. businesses "bore virtually all of the costs," the report said.

And, surprisingly, these weren't only China-exposed companies. Investment incentives for players outsidethe bilateral tusslewere frequently hit.

Perhaps the most striking finding was the protracted nature of the damage on market players accustomed to volatility often measured in hours or days or a presidential tweet's fleeting life span.

"Reductions in share prices due to trade war announcements significantly lower firm-level investment rates four quarters later," the report found. "Most of the 2019 effect is driven by the impact of tariffs on U.S. firms doing business with China, but the 2020 effects are driven more by the fact that tariff announcements drove down returns of firms regardless of their exposure to China."

Even when it was China that was hurt there often was pain caused to American businesses along the way. The slowing of the Chinese economy partly because of the hostilities, and China'snontariff counterattacks, "likely diminished the returns [U.S.] firms made on investments in the Chinese market."

No one expected a protectionism contest between the world's superpowers to be cheap. But the costs have come in various forms and often with America left holding the bill.

Tanner Brown covers China for MarketWatch and Barron's.

https://www.marketwatch.com/story/trade-war-collateral-damage-destruction-of-17-trillion-in-us-companies-market-value-2020-05-30

Fed study finds Trump tariffs backfired

Published: Dec. 28, 2019 at 8:41 a.m. ET

ByGreg Robb

2018 tariffs meant job losses, and higher prices for the U.S. manufacturing sector

President Donald Trump's strategy to use import tariffs to protect and boost U.S. manufacturers backfired and led to job losses and higher prices,according to a Federal Reserve study released this week.

"We find that the 2018 tariffs are associated with relative reductions in manufacturing employment and relative increases in producer prices," concluded Fed economists Aaron Flaaen and Justin Pierce, in an academic paper.

While the tariffs did reduce competition for some industries in the domestic U.S. market, this was more than offset by the effects of rising input costs and retaliatory tariffs, the study found.

"While the longer-term effects of the tariffs may differ from those that we estimate here, the results indicate that the tariffs, thus far, have not led to increased activity in the U.S. manufacturing sector," the study said.

Tit-for-tat trade retaliation is an idea best relegated to the past, given the presence of globally interconnected supply chains, the Fed researchers found.

The top ten manufacturing industries hit by foreign retaliatory tariffs were producers of magnetic and optical media, leather goods, aluminum sheets, iron and steel, motor vehicles, household appliances, sawmills, audio and video equipment, pesticide, and computer equipment.

The top ten industries hit by higher prices were: aluminum sheets, steel products, boilers, forging, primary aluminum production, secondary aluminum smelting, architectural metals, transportation equipment, general purpose machinery, and household appliances.

The researchers don't measure the effects on business confidence resulting from the uncertainty regarding U.S. international trade policy. Many economists see this doubt about future government policy as a primary driver in the decline in business investment this year.

While the Federal Reserve did not specify companies affected by the U.S - China trade dispute of the past 18 months, semi-conductor and electronics manufacturers that depend on China for sales, like NVIDIA Corp.NVDA,+4.57%,Micron TechnologyMU,+3.09%,and Intel Corp.INTC,+1.99%are seen as especially vulnerable in a trade war scenario.

Apple Inc.AAPL,-0.09%has been able to escape tariffs on its China-assembled phones to date.

While Chinese consumers mostly buy locally made automobiles, U.S. manufacturers like Tesla Inc.TSLA,+3.62%have been at risk. The electric vehicle maker first raised the price of its Model S and Model X cars by $20,000 after a new round of trade tariffs but then cut and decided to absorb the difference. However, together with its Chinese partners, General MotorsGM,-2.99%sold 3.6 million vehicles in China in 2018, more than in the United States.

Some executives have blamed import tariffs for higher costs including heavy equipment manufacturer CaterpillarCAT,-0.50%

https://www.marketwatch.com/story/fed-study-finds-trump-tariffs-backfired-2019-12-27?mod=article_inline