Christian Drake: We’ve got a Quote of the Day here this morning. Here’s your quote:
“We will not use Currency Devaluation as a weapon in the trade war.”
That’s the Chinese Premier Li Keqiang. Just to put this in context. Here’s the chart of the Chinese yuan. “We will not [continue to] use it as a weapon” is probably a more apt description. The market has already done the devaluation work for them. As you can see, the Yuan is down -9% off the highs.
The government can claim plausible deniability as it concerns state-sponsored currency manipulation. You don’t need to do it when it’s already been done. At down -9%, it’s effectively negating the tariff-related impacts imposed thus far.
Drake: It also goes toward what is a tragic, comical situation domestically to the extent that the domestic response to trade policy is ineffective. You've had this currency response that could cause the U.S. to double down on these protectionist policies that caused the currency devaluation in the first place. And around and around we go.
I just wanted to redux the Tariffs 101 data here. So if you’re writing headlines you can kind of frame this up in a few different ways. You can write “Tariffs on $200 billion worth or imports from China” as your headline.
Recall, tariffs aren’t $0 here currently. The effective tariff rate on Chinese goods is roughly 3%. So if you’re already running 3% tariffs on average, you’re talking about $6 billion in trade duties already being paid. If that rate goes up to say 10% you’re talking about $20 billion in total tariffs paid. The net of that is a $14 billion increase in prospective tariffs.
So from a headline writing perspective you can say “Net Import Tariffs are going to increase by $14 billion” or it’s more sensation to say that “We’re going to impose tariffs on $200 billion worth of Chinese goods.”
Again, Tariff 101 says the cost of tariffs are generally born by the country actually doing the importing. Price increases can either be passed on to consumers or eaten by the company in the form of lower margins, or some combination of those to things.
To the extent the trade escalation occurs, we’re going to see costs be absorbed by the seller here domestically.