Proposed Tariffs Against China Could Disrupt Economy's Momentum, Says Analyst

The U.S. economy is robust, household wealth is “doing pretty well,” the stock market is “mostly rising” and unemployment is low, but politics in the U.S. and other parts of the world “are complicated,” said Behravesh. The “worry," he said, “is that politics could derail the outlook.” So far, consumers and businesses “have tuned out the politics,” with economic fundamentals strong "even before the tax cut," he said.

But consumers and businesses aren’t happy about the Trump administration's recent tariff talk that created “a lot of uncertainty and confusion,” said Behravesh. A concern is how companies’ worries over tariffs will affect capital spending, he said. Industries such as chemicals, oil and gas “have kind of hit the pause button in terms of capital spending,” he said. Steel, a prime target of the administration’s tariff talks, “obviously has a big impact on capital spending.” A potential negative impact arises if tariffs lead domestic steel and aluminum producers to raise prices, which could cause a decline in gross domestic product and a rise in the consumer price index, said Behravesh.

Behravesh called trade a “positive sum game” with more winners than losers, while protectionism creates more losers than winners. Citing examples from steel tariffs imposed on China by President George H.W. Bush’s administration and tire tariffs imposed by the Obama administration, Behravesh said the layoffs caused by higher steel and tire costs far outweighed the jobs saved. While agreeing with those who argue that China “doesn’t play by the rules,” Behravesh said tariffs aren’t the way to respond “because they hurt us more than they hurt them."

The U.S. should be working with the European Union and other trading partners to put “intense pressure on China to play by the rules,” Behravesh said, “rather than raise tariffs which in the end hurt us more than they do the Chinese.” China “will respond to the pressure,” making working with partners even more critical to ensure China doesn’t bypass the U.S. in trade, he said. “We have to be very, very careful how we play this game.”

Ending on a positive note, Behravesh said that, assuming trade issues are worked out, the U.S. and global expansion can go on for another two years. The current recovery will soon be the second longest since the 1850s, "and the longest -- if we make it to July 2019 -- unless the politicians mess it up.”

* * * * *

The automotive industry will see another year of contraction in 2018, said J.D. Power analyst Thomas King in an automotive outlook. Global vehicle sales are expected to drop from 14 million last year to 13.8 million in 2018, but average prices are forecast to rise to $32,200 from $31,000 last year, he said. Manufacturers are seeing the upside of the price increases, but dealers are taking a hit due to incentives and competitive financing, he said. Dealer inventories are up due to the rise in used and leased vehicles, he said, offering an attractive option for customers increasingly priced out of the new car market. Cars are declining as a percentage of overall vehicle sales in an ongoing consumer shift to trucks and SUVs, said King. Cars were 32 percent of retail sales in February year on year, down from 36 percent in February 2017 and 41 percent in February 2016, he said. If the trend continues, cars’ share of the vehicle mix could fall to the low 20 percent “or high teens," putting pressure on carmakers to further shrink car offerings, he said.

Forty-two percent of hybrid, plug-in hybrid, fuel-cell and battery electric vehicles sold in the U.S. last year were made by Toyota or Lexus, said Bill Fay, senior vice president-Toyota Motor North America, in a presentation. Toyota is still working on improving the battery electric segment to address consumers’ “range anxiety,” ability to charge and vehicle costs, Fay said. The company sold 3,000 fuel-cell vehicles in California last year, he said. There needs to be a “generational jump” in battery electric technology before Toyota gets to a point where it can offset customer apprehensions, he said, predicting electrified vehicles will continue to be a larger percentage of sales going forward. By 2025, the company goal is for everything Toyota sells to have either an electric option or be an EV, he said. Software and technology -- what Toyota calls mobility-as-a-service -- are driving opportunities for near-term growth, Fay said, referencing the company’s Safety Sense suite that’s designed to support better awareness, decision making and vehicle operation. As cars become more integrated with the connected world, consumers view the features as “required components of their ownership experience.” He cited a McKinsey Global Institute study as saying 37 percent of consumers would change brands for a connected car.

Toyota is working with the Trump Administration on the tariff issue, hoping to reinforce the need to make decisions that are “good for consumers, good for dealers, good for the economy,” and good for the manufacturing base building vehicles in the U.S., said Bill Fay, senior vice president-Toyota Motor North America. The economy is strong, consumers have confidence and interest rates are still “reasonably affordable,” said Fay. “Let’s be smart in our policy decisions” to support the positive business environment, he said. “A big tariff is only going to add to the cost of cars and trucks that consumers have to pay for.”