[REN #737] China-U.S. Trade War Escalates, Increasing Construction Costs

Stacks of shipping containers for Real Estate News for Investors Podcast Episode #737

The trade dispute with China is escalating and some U.S. businesses are cringing at the idea of higher costs for goods. President Trump raised tariffs again on $200 billion worth of Chinese imports, from the previous 10% increase to 25%. He’s getting support for his strategy but some economists are predicting that the trade war will take a toll on U.S. businesses and consumers.

The latest U.S. increase on tariffs went into effect on Friday, May 10th. China reciprocated on Monday, May 13th with higher tariffs on about $60 billion of American goods. And, it’s creating what the New York Times called “economic anxiety.” (1)
 

Higher Tariffs Create “Economic Anxiety”

The retaliatory move shook up the stock market with the Dow plunging as much as 700 points. That’s after losses last week over the same issue. Companies with high exposure to China, like Apple and Boeing, are more vulnerable to this stock market volatility. Some economists believe the end result of these tariffs could hit consumers the hardest, as businesses pass on the costs.

However, Chief Investment Officer, Louis Navellier of Navellier & Associates doesn’t agree. He said in a recent podcast that the cost of goods from China have actually fallen by 9/10ths of a percent this past year, in spite of the tariffs. He says that’s due to the devaluation of the Chinese Yuan combined with a strong U.S. dollar. The tariffs have not had much of an impact on prices yet, but the U.S. government will make a lot of money on the tariffs. He also says China won’t dump Treasuries. In fact, those yields are already declining.

Navellier said, “We’re threatening more tariffs if they don’t come round, especially on intellectual property. This is shockingly bipartisan. Politically Washington, D.C. doesn’t agree on a lot of things but they do agree on this intellectual property argument. China doesn’t respect our trademarks or patents. They like to copy our technology. There’s already a fight over 5G.”

Navellier said the fight will likely include Europe soon. If you export a car to Europe, there’s a 10% tariff, but if you import a car to the U.S., there’s a 2% tariff. The Trump Administration wants to level the playing field. And since the U.S. has the strongest economy in the world, Navallier thinks we’ll win these trade wars. So, he said, don’t worry. It’s a buying opportunity.

Boston Fed President, Eric Rosengren, offered a few comments on the impact. He was quoted in a Reuters story saying, “I think that the U.S. economy is strong enough that it can withstand the trade issues that are coming up right now.” (2) He said, “If it starts to be a situation where we expect tariffs to be high for a long period of time, it does start to disrupt trade patterns.”
 

Consumers Pick Up the Tab

Some economists do believe that consumers will pay the price for more expensive goods. According to the New York Times, the list of products getting hit by the tariffs includes $23 billion in computer parts, $11.3 billion in furniture imports, $9.2 billion in auto parts, and $6.6 billion in luggage. You’ll also find many kinds of food products on the list, along with chemical products and building materials.

How could this trade war affect the real estate industry?

CNBC published an article with the title, “Higher Chinese Tariffs Just Made Your Home Renovation Much More Expensive.” (3) The article says the list includes about 450 products often used by the home renovation and construction industries. CNBC says, “From tile to countertops, laminates to lighting, all the fancy furnishings… worth approximately $10 billion a year in expenditures nationwide — are on the list.” The National Association of Home Builders says, the previous 10% increase in prices on those products added a $1-billion yearly expense. The new rate will add $2.5 billion.
 

Tariffs Hitting Construction Industry

Consumers will be somewhat insulated from the tariff costs until next month, but the NAHB says they are already rippling through the construction industry. The Times cites an example. It says a remodeler in Washington, D.C. has clients who are reducing the size of their projects because of the anticipated cost of materials with higher tariffs. The remodeler, Bruce Case, says, “At the end of the day, I can guarantee you the price of every product we do is going to go up.” He’s estimating a 7% to 8% increase in costs to the consumer.

The New York Times says, “Almost every kind of lighting fixture that most American stores sell is imported from China, and all are on the list.” Companies already have their supply chains set up, expecting to pay a certain amount for things like wooden shingles, which will now be more expensive. The construction industry has already been paying a 25% tariff for imported steel and aluminum.

A group of business associations called “Americans for Free Trade” warned the Trump Administration to avoid another tariff increase. The National Retail Federation, which is part of that group, said in a statement, “Tariffs are taxes paid by American businesses and consumers, not by China. A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses, especially small companies that have limited resources.” The Federation supports meaningful changes in China’s trade practices, but opposes a tax that punishes U.S. consumers as a negotiating tool.
 

Trade War Costing Billions

President Trump believes his approach will help the U.S. economy overall. He offered some advice on Twitter, saying U.S. consumers can avoid the tariffs by purchasing products from a non-tariffed country, or that were made here. He also tweeted a warning to China against any retaliation saying things will only get worse. Of course, China is retaliating, as I mentioned, but both sides hope to resolve the disagreement.

As reported by Reuters, the trade war has already cost both sides billions of dollars. President Trump says they had almost reached a deal when China started renegotiating the details. That’s when the President gave the go ahead for the new tariffs. He says, if the two countries can’t reach a deal, the U.S. will return to the manufacturing of products now supplied by China. Trump says, “It’ll be the old-fashioned way, the way we used to do it: We made our own product.”

Chinese Vice President Liu He says, “Negotiations have not broken down.” He says that China is simply not willing to make concessions on some issues. The President is planning on meeting with the Chinese president at the G20 summit next month. So, this trade war is still very much up in the air.
 
Links:

(1) New York Times Article

(2) Reuters Article

(3) CNBC Article

 

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