The Motley Fool

Quick Thought Of The Week: Brave

The White House economic advisor, Larry Kudlow, is a brave man. He had the courage to say on record what everyone in the world – apart from one man – knew all along about the tariffs on Chinese-made goods entering America. It is not China that pays the tariffs but US households, US manufacturers and US importers.

Why has it taken this long for someone inside the administration to state the blindingly obvious?

According to the White House, it is raking in billions in tariffs. But those billions are not coming from China. They are, instead, ultimately coming from the pockets of US consumers, who are effectively paying another tax on their purchases. Exactly how that can be “very good for USA” is unfathomable.

For a country that believes in low taxes, it is quite laughable. But not satisfied with raising tariffs from 10% to 25% on US$250 billion worth of Chinese-made goods, the US administration is now eyeing the remaining US$300 billion of Chinese imports….

…. So much for trade wars being easy to win.

Chinese exporters could, if they wanted, trim prices to blunt the impact of the extra tariffs. But the People’s Bank of China has already done some of the heavy lifting for them ….

…. Over the last 12 months, it has cut the exchange rate of the Chinese yuan from US$6.34 to US$6.88 – an effective devaluation of 8%.

It could continue down the path of devaluation. But that seems unlikely, given that it could push up the price of its imports, which could be inflationary. But some devaluation cannot be ruled out.

It could also leave things as they are and just allow market forces to prevail, which is ironic since it is a mercantilist, command economy. It has already retaliated by imposing tariffs of up to 25% on a range of US goods.

This trade dispute shows scant signs of being resolved. Probably the best that we can hope for is a truce. Volatility could be heightened. But there’s nothing too wrong with that, if you know what you are buying and why you are buying it.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.