Economically, Tariffs Produce Collateral Consequences
While there’s still hope that a trade deal with China can be reached, the worldwide rise of protectionism is a discouraging development.
To read the full article from Chief Economist Scott Brown, see the Investment Strategy Quarterly publication linked below.
Many of us tend to think of globalization and trade with China as recent phenomena, but that’s far from true. Ancient empires interacted with each other, trading spices, silver, and gold. The Silk Road, expanded by the Han dynasty in 114 BCE, brought Chinese goods to India, Persia, Greece, and Rome. By the first century CE, the 1% of Rome and Carthage were dressed in silk.
A Tang shipwreck discovered off the coast of Indonesia in 1998, dated to around 825 CE, contained some 60,000 items, mostly Chinese ceramics. The young United States traded with China after it lost its only source for tea (England) following the Revolutionary War. Trade brought an exchange of goods and cultures, but varied over the centuries as empires came and went.
In studying economics, one learns early about the concept of comparative advantage and the benefits of trade. There are winners and losers (as trade with another country picks up), but both benefit overall.
- Tariffs raise costs, disrupt supply chains, invite retaliation in the form of increased tariffs against U.S. exports and dampen business fixed investment.
- There is growing evidence that tariffs are having a negative impact on U.S. economic growth, but to date, they appear unlikely (by themselves) to push the U.S. economy into a recession. The potential third round of tariffs would have a greater impact.
- The Federal Reserve could lower short-term interest rates by the end of the year. Such an outcome is already anticipated in the federal funds futures market, which is pricing in a 90% chance of one or more rate cuts by the end of this year.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance that any forecasts will be realized.