Read my lips – pay more taxes

Posted by: Paul Donovan

10 May 2019
  • US President Trump has followed through on the pledge to make Americans pay more taxes. Howeve,r the increase in trade taxes on USD 200bn of Chinese imports only applies to new purchases – so it will take two or three weeks for the taxes to actually hit.
  • Because trade negotiations are continuing, companies are unlikely to change their prices. These taxes will erode US corporate profits, rather than push up inflation. The longer the negotiations go on, the greater the economic damage. A longer period of uncertainty will further delay corporate investment – which in turn hurts exports and manufacturing.
  • The longer the negotiations last, the greater the prospect of passing on the tax increases as price increases. This would first be seen in core producer price inflation. Markets will need to monitor the Trump Twitter Feed for signals on the negotiations. If the Trump Twitter Feed is volatile (and the Trump Twitter Feed might be volatile) that could produce market volatility.
  • A quick deal on trade would not do much economic damage. Lengthy negotiations would stop the signs of economic stabilisation, and probably push global growth below trend (after eight years of remarkable stability). A breakdown in negotiations risks a far more negative economic outcome.