Tariffs Hit the Spin Cycle

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by Blaine Dickason
Vice President, Fixed Income Trading and Analysis

Although tariffs and trade disputes have been front and center in the news, their impact may not yet be felt by U.S. consumers. If you’ve purchased a washer and dryer recently, it’s likely that you now have firsthand and inadvertent experience bearing their cost.

A report published last week by the Becker Friedman Institute evaluated the impact of the February 2018 global tariffs placed on imported washing machines. While on one hand, 1,800 planned U.S. manufacturing jobs have been announced from the increase in domestic     production, the study estimates a total tariff-related cost borne by U.S. consumers of $1.5 billion, which equates to approximately $820,000 per job created.

In the simplest terms, a tariff is a tax on trade between countries, typically with the goal of protecting or encouraging a domestic industry. Although the tariffs examined in this report were only on imported washing machines, this study found the average price of a washing machine went up almost 12 percent against a control group of other appliances regardless if it had been produced domestically or abroad.

Consumers never got the chance to buy the relatively cheaper domestic models because those prices were soon raised to be in-line with the imported models. In addition, since most washing machines are sold in pairs with a matching dryer at an identical price, the study found that dryer prices also increased by nearly 12 percent. All told, a washer/dryer set became approximately $180 more expensive.

From 2012 to 2018, only Mexico, South Korea and China were targeted with washing machine tariffs. Almost immediately after their implementation, production moved to other low-cost, non-tariff countries and consumer prices fell over that period. While these targeted tariffs were meant to hurt manufacturers in specific countries, they instead had the effect of “squeezing the balloon” and production relocated to more favorable export-oriented economies.

Wash, Rinse, Spin, Dry: (1) Global tariffs raise costs that get borne by the U.S. consumer. (2) Targeted tariffs on goods may merely shift the country of production and can possibly lower costs for consumers. (3) Domestic producers can benefit from raising prices to match tariffs. (4) Tariffs can be an expensive way to create jobs.

We may see this cycle again as the trade disputes continue.

Week in Review and Our Takeaways

  • The S&P 500 traded to its first new closing high this week since September 20, 2018. It took just 80 trading days to recover the 20-percent drawdown seen in the fourth quarter of 2018

  • First quarter 2019 GDP was reported at +3.2 percent this morning. The volatile inventories and net trade categories beat estimates, while domestic sales came in below

  • As of this morning, 53 percent of the S&P 500's market cap has reported their results for the first quarter. Earnings are beating by 7.2 percent, with 77 percent of companies exceeding their bottom-line estimates. This compares to 5.4 percent and 71 percent respectively over the past three years, according to Credit Suisse