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Market Pullback Possible Over Trade, Tariffs: Andy Friedman

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“For almost one and a half years, President Trump’s tariff initiative has confused and roiled the markets,” said former tax attorney Andy Friedman in Friday morning’s “The Washington Update.” 

That proved to be the case as the equity markets weakened on Friday, the morning after President Donald Trump vowed to impose 10% tariffs on the remaining $300 billion of Chinese imports on Sept. 1. Over the past 15 months, the U.S. has levied 25% tariffs on $250 billion of Chinese merchandise. 

“If the lack of progress [in trade talks] becomes apparent — or if businesses report lower earnings due to tariff-induced cost increases — a market pullback may follow,” according to Friedman.  

Trump first levied tariffs on imports in early 2018.

“The power to impose tariffs lies with Congress,” Friedman said. “But Congress long ago delegated that authority to the president in cases of national emergency or to protect national security.” 

While the president is using tariffs in the hope of getting trading partners like China to negotiate more favorable trade treaties, “This process has confused the markets and caused volatility,” Friedman wrote.

On Thursday, Federal Reserve Board Chair Jerome Powell described “trade policy uncertainty” as one reason for the group’s decision to cut interest rates by 25 basis points.

The markets dislike tariffs since “they can impair economic growth” via higher prices and declining U.S. exports, Friedman says. China, for instance, has hurt U.S. farmers by its refusal to buy U.S.-made soybeans.

Trade agreements, in contrast, generally boost the markets because they are seen as supporting global trade and economic performance.   

“Complicating matters further, as we have seen, a lack of progress or lower earnings may prompt the Fed to continue to lower interest rates — turning a negative situation into a positive one,” Friedman explained. “For now, we recommend that investors view the China trade negotiations with a wary eye.”

On Friday morning, Chinese authorities said they would use “necessary countermeasures” against the U.S. if Trump’s latest tariff move is executed on Sept. 1.

As for the new North American trade treaty, now in negotiations, it asks manufacturers in Canada, Mexico and the United States to pay workers the same minimum wage. “But, in the Democrats’ view, the treaty does not enforce these rules by, for instance, imposing penalties on non-compliant Mexican manufacturers,” Friedman said.

For now, congressional approval of this trade deal “looks doubtful, a result the markets appear to have taken into account.”

The Commerce Department reported Friday that U.S. imports from China fell 12% in the first half of 2019 from the year-ago period, and exports dropped 19%. With total China-U.S. trade valued at $271 billion for the six months, Mexico and Canada both moved into the top spots as U.S. trading partners — a first since 2005.

In brighter news, Trump reached a deal on Friday with the European Union to allow the United States a guaranteed slice of a 45,000-ton beef import quota.

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