Every day we try to make sense of the Administration’s disruptive trade war and now, with all the economic realities caused by the coronavirus, perhaps it’s time for President Trump to disband the China tariffs. Mr. President tear down that tariff wall, lift the stock market, let’s help American retail!
To that point, a definitive memory comes to mind.
It was a hot summer night on board a luxury yacht in Georgetown harbor and several dancers were gyrating up a storm. The scene looked particularly odd because the music wasn’t audible to anyone except the dancers. Checking historical imagination, Friedrich Nietzsche said: “those who hear not the music, think the dancers mad.”
While others shrugged and walked by the yacht, I could only think of Washington’s trade fascination with China. What if President Trump’s China trade war was headed in the right direction after all? What if the President (like the dancers) heard the music and we just didn’t?
Is it possible that Trump’s tariffs would solve our trade issues with China, or did our rapidly growing economy and (formerly) rising stock market mask the illusion that damage wasn’t being done? Presidential Economic Advisor Peter Navarro made the case when he said; “We’re already in a trade war with China, the problem is that we have not been fighting back. Trump, through tariffs wants to call a truce.”
It’s essential to pause at this point and note that Peter Navarro’s comment is illogical. By weaponizing tariffs, the President told America to stop doing business with China. Perhaps the theory was to elevate the cost of Chinese products, so that purchasing would grind to a halt and China might settle-in at the negotiating table. If fact, that’s pretty much what happened on January 15, 2020, as the China Phase One trade deal was signed in the East Room at the White House.
What Navarro left out of the trade-war picture was the carnage and roadkill for the retail and fashion industries that was splattered along this perilous route. Make no mistake, retail stores are closing, retail bankruptcies are being filed, and last year 77,000 retail workers lost their jobs. True, there are other issues in play, including the seismic shift to on-line and to a new millennial customer. However, added tariff costs have also squeezed retail margins. In January 2020, with employment on the rise, retail lost another 8,300 jobs.
It’s clear to those of us who have lived this dream and walked this walk, the Trump Administration embarked on their China trade mission without a strategy. Their origins were simple:
#1 – China is stealing our jobs
#2 – Our China trade deficit is too high
As time marched past the original rhetoric of the Trump Administration, American unemployment hit a 50-year low and the China Trade deficit became $44 billion dollars larger. The Administration was forced to shift gears and change their China talking points.
Navarro eventually switched to his China “7 deadly sins” strategy which stated that the issues with China were now about forced technology transfers, theft of intellectual property, currency manipulation, cyberattacks, state-owned enterprises, dumping, and fentanyl. When Phase One kicked in on Feb 14, 2020 some of these 7 sins were grazed, and probably none were terminated. Navarro, to his credit, has now moved on to his next stage called “4 drivers of growth.”
As China Phase One begins to implement, US farmers, manufacturers, energy companies, and financial service groups are projected to be the big winners, and American retailers and domestic manufacturers (who use imported components) are the actual losers. In fact, it is likely that Navarro’s 7 deadly sins have put American retail directly into the 5 stages of mourning.
Truth be told, most of the industries that were under tariff before Phase One, are still under tariff. If you were at a 25% tariff (like handbags/gloves), it’s still 25%. If you were at a 15% tariff (like most apparel and half of all footwear), you are now at 7.5%. In fact, approximately 71% of everything from China is still being taxed!
Unfortunately, this hits apparel and retail particularly hard, since most of the items that come from China will be taxed at an additional 25% or 7.5%. For the American consumer, this means that prices will rise. Since January 1, numerous retailers have announced their plans to pare retail doors or shutter altogether. It’s hard to say, how much of these closures are tariff related, but the loss of margin (due to tariffs) doesn’t help.
In contrast to the ongoing retail melt down, sales during the holiday season were up close to 4%. Casual observers might think that all appears rosy, but “earnings season” is now showing a few cracks in veneer. In 2019 there were 9,300 announced door closings, and this year has started off with about 2,400.
Is the end in sight for the China trade war, or has it just been put on pause? Calling a truce to a trade war (even if it’s one that you started), is always refreshing, but we should understand that following China Phase One, there may never be a completed Phase Two.
Everyone should also realize that the tariff man won the first round. The music I didn’t hear on the Georgetown waterfront continues to play. The dancers are in place, moving to their own sounds of silence.
For retail and apparel, it’s time to move on from the tariff war, establish alternate sources of supply, raise prices, or hope that the tariff man decides to tear down the artificial tariff wall that he built (in an effort to resurrect our sliding stock market).
Surely, we will continue to protest against tariffs, but the felled tariff tree in the forest wasn’t noticed. It’s going to take more retail store closures, or even more collapsing equity prices to get some movement from Washington.
Is the end of our dilemma in sight, or do we continue to gesticulate to sounds that no one hears?
At this point in time, we can easily reflect on the words of Sly (of the Family Stone) – who had it right when he said that we need to dance to the music:
All we need is a drummer
For people who only need a beat
I’m gonna add a little guitar
And make it easy to move your feet…..
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