President Trump has declared he will extend tariffs of 25% on all America’s imports of Chinese goods. China is responding with tariff increases of its own. The consequences of this action and reaction will be to kick-start higher monetary inflation in America and an economic slump. This article explains how an overdue credit crisis will be made considerably worse by trade protectionism. It could become the credit crisis to end all credit crises and undermine the whole fiat currency system.
Following President Trump’s imposition of 25% tariffs on all Chinese imports, it is time to assesses the consequences. Already, we have seen a contraction in US-China trade of 20% in the first three months of 2019 compared with the same quarter last year, and also compared with the average outturn for the whole of 2018.[i] This contraction was worse than that which followed the Lehman crisis.
In assessing the extent of the impact of Trump’s tariffs on the US economy, we must take into account a number of inter-related factors. Clearly, higher prices to US consumers will hit Chinese imports, which explains why they have dropped 20% so far, and why they will likely drop even more. Interestingly, US exports to China fell by the same percentage, though they are about one quarter of China’s exports to the US.
These inter-related factors are, but not limited to:
- The effect of the new tariff increases on trade volumes
- The effect on US consumer prices
- The effect on US production costs of tariffs on imported Chinese components
- The consequences of retaliatory action on US exports to China
- The recessionary impact of all the above on GDP
- The consequences for the US budget deficit, allowing for likely tariff income to the US Treasury.
These are only first-order effects in what becomes an iterative process, and will be accompanied and followed by:
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