My wife and I have raised chickens and ducks for four years. We sell eggs by the road when our fridge is full. Some years are better than others, this year we have an abundance and are grateful, but we can’t find anyone willing to buy duck eggs. We put in a lot of work in the winter: feeding, watering, and protecting the fowl. We indeed maintain a non-profit status, but we enjoy it.
We try to keep the roadside cooler full but when a truck drove up to our empty cooler last weekend - the driver waved at me. He appeared to be from Central America and when I went out with a dozen eggs, he admitted he didn’t speak English very well. I got him to laugh at my limited Spanish but he wanted 6 dozen more eggs. We had no more chicken eggs, but I offered our abundance of duck eggs. “Duck eggs? I used to eat them in my homeland with Coca-Cola.” I sold him our duck eggs backlog as fast as possible.
On a transactional basis, this is the value of economics and trade. Trade provides one surplus or skill to another in exchange for a good or payment, while economics is the study of human behavior. Human behavior is more than the transaction – it is the experience and interaction. When I went inside to tell my wife about the duck eggs sale and the Coca-Cola, we first laughed at my clear misunderstanding but with a few internet searches, there are several Coca-Cola duck egg recipes – some tea-soaked and some cooked in a stir fry.
The point of this story is not to advocate for the barter system (no matter how tempting it may feel at times), but it is to show how engrained trade and globalization are in our day-to-day lives. We live in a free society, based on laws and the largest free market in the world, with free trade between states. A product from New York or Texas is not taxed any differently than one made in Maine. We gain more from each other in trade – experience, knowledge, and productivity.
The Trump Administration applied tariffs across the board on April 9th but issued a 90-day pause on the first day of the rollout on countries that had not retaliated, keeping the baseline tariff rate of 10%. Economists have questioned how tariff rates were determined. A baseline rate of 10% was applied across the board to all countries, excluding Russia, North Korea, and Cuba. Rates above 10% were based on trade deficits for goods the United States has with other countries. By basing the rate only on goods, it excludes services where the United States has trade surpluses with many other countries. This inflated the tariff rate applied. Furthermore, the formula inflated the rate because they used retail prices, or the final price (which includes domestic distribution costs), as opposed to the import prices of the good. The economists criticizing the Trump Administration’s formula find that if the conventional formula were applied to tariffs on Vietnam, for example, tariffs would be 12.2% vs. 46%. Trump tariffs based on massive error, conservative think tank AEI says
The Trump Administration announced 37% tariffs on Bangladesh last week. Compared to the U.S., Bangladesh is a poor country where workers manufacture clothing, which U.S. consumers buy. Bangladesh does not buy many U.S. goods because U.S. goods are expensive. That’s not due to a tariff, that’s a trade deficit and a tariff won’t improve a U.S. consumer’s or a Bangladesh garment worker’s position. It does erode cooperation and trust, core tenets of economics and free markets, and will reduce trade and globalization.
Based on these tariff rates, equity markets continued to sell off but rebounded on the 90-day pause. U.S. bond yields rose before the pause and the dollar weakened against some currencies, particularly the Euro. In statements, Trump acknowledged the reactions of the U.S. bond market for reasons to pause the tariff rollout. The 30-year U.S. Treasury Rate’s 3-day increase was the fastest since 1982 before the pause.
China Under Pressure: The Trump Administration is targeting China with tariff announcements. The policy is directed at China directly but also on China’s attempt to send Chinese products through other countries to avoid previous U.S. tariffs. Both countries have escalated trade tensions, increasing reciprocal tariffs on each other. The pressure on China is large and the country began a controlled devaluing of its currency by selling U.S. Treasuries and buying the Yuan. By lowering the value of their currency, it makes Chinese goods cheaper, offsetting the impacts of some of the tariffs. China can’t do that forever because they only have so much in U.S. Treasury reserves. If China allows the Yuan a deep devaluation, it points to China going it alone against the United States in the trade war and will mean a lot of pain for Chinese investors and companies, as the Yuan falls, and Chinese growth slows. China Engineers Orderly Yuan Drop as Trade War Threatens Growth
Financial Planning/Investment Strategy Corner:
Amidst this uncertainty around U.S. policies, diversification continues to be key with international equity markets down year to date, just not as far as U.S. markets:
Investors are seeing the same in global bonds, with international indices higher compared to U.S. bond indices year to date:
In the equity sell-off, seeing the 10-year Treasury yield rise has confounded some investors and may mean investors want to hold fewer Treasuries and U.S. Dollars. The German 10-year bond has remained stable, even as Germany and Europe embark on a government-funded stimulus: US Treasuries Sell Off | Morningstar
Quick Hits:
- A Chef who has lived this life right: What Jacques Pépin taught me about omelets and life
- Ohio’s mounds open for the first time in 100 years: The US's 2,000-year-old mystery mounds
- ‘Art in Bloom’: At the Portland Museum of Art, florists offer a fresh perspective
- One more on tariffs from the trade expert - Doug Irwin: Economics professor and U.S. trade expert Doug Irwin critiques Trump administration’s tariffs - The Dartmouth
Quote: “I have a trade deficit with my grocer, a trade surplus with my employer. I am not sure it would be a great idea for me to work for my grocer.” – Olivier Blanchard
Also: “There’s no failure. You eat your mistakes and move on” – Jacques Pépin
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