Sympathy for the Tariff Devil
Trump appears to be normalizing tariffs as pro-growth economic policy. This is likely a ploy to bring China back to trade negotiations. But if Trump is sincere, and tariffs on Chinese exports become a permanent fixture, they should not be conflated with deadly tariff episodes in the past such as Smoot-Hawley. Tariffs are just taxes – “sin taxes” designed to alter behavior. In this case, reducing trade with China may well be a positive net present value undertaking, especially for underdiversified firms like Apple. Thanks to yuan weakness, China effectively pays for the tariffs, and funds a war-chest with which the US Treasury can make trade-adjustment payments to victims of Chinese retaliation. If the next round of proposed tariffs kicks in, we expect significant further RMB weakness. The real risk of tariffs is their effect on Chinese growth, possibly triggering a first-ever recession, perhaps a hard-landing that would trigger a global recession.