The likelihood of corporate profit margins tumbling from a 2018 record to pre-tax cut levels or lower increased after President Trump brushed off the possibility of a quick trade agreement with China to end pricey tariffs on the country’s imports.
“We’re not ready for a trade deal,” Trump told reporters during a Monday news conference with Japanese Prime Minister Shinzō Abe, maintaining that Beijing regrets wavering on a potential agreement this month, a move that prompted the U.S. to abruptly double duties on $200 billion of Chinese goods and threaten levies on $300 billion more. “We’re taking in tens of billions of dollars of tariffs, and that number could go up very, very substantially, very easily.”
The impasse in talks, which hammered U.S. financial markets this month, alarmed companies large and small as well as farmers, whose typically narrow profit margins are being tightened even further.
Margins at firms included in the S&P 500, a leading gauge of U.S. stock markets, dropped to an average 11.6% in the first three months of this year — down from a record high of 13% in the third quarter of 2018 before the duties took full effect, said David Bianco, chief investment officer for the Americas at DWS, the asset manager partially spun off from Deutsche Bank. That compares with an average 11.2% in 2017, the year before GOP-led tax cuts took effect.
Profitability may remain above 11% this year if the U.S. doesn’t impose additional levies or reduce existing ones, Bianco said.
Still, “a 25% tariff on a wide range of products is much harder to stomach without either losing some buying capacity from consumers or survival chances of some suppliers,” he said. “Any further escalation could cause S&P 500 profits to decline in 2019 and offset all the tax-cut benefit.”
Economists, executives from businesses of all sizes, and even some GOP lawmakers have long warned that Trump’s trade wars (not just with China but traditional U.S. allies) risk undermining the benefits of the Republican-led tax overhaul in 2017 and looser regulations that Trump intended to stimulate growth.
“We are shooting ourselves in the foot by imposing big new taxes on Americans,” David French, chief lobbyist for the National Retail Federation, which represents an industry employing 42 million people, said earlier this month. The Trump administration began tacking levies onto Chinese goods last year, hoping to eliminate a trade imbalance between the two nations while forcing Beijing to further open its markets to American companies and halt its appropriation of U.S. intellectual property.
Duties of 25% on $50 billion in imports and 10% on $200 billion in products took effect before the administration paused levy increases for three months, starting in early December, after Trump and Chinese President Xi Jinping decided to work toward a long-term agreement.
The moratorium expired in early March, but Trump stretched the timetable for talks and was upbeat about progress as recently as late April. That soured when Beijing began trying to walk back its commitments to pivotal terms, according to U.S. Trade Representative Robert Lighthizer.
Now, neither side is in a hurry to make a deal, said Mark Haefele, chief investment officer for global wealth management at Swiss lender UBS. China likely believes it benefits from every delay in making concessions the U.S. demands, he said, and Beijing can ramp up pressure on U.S. companies with tactics such as increased inspections and permit delays while targeting business leaders close to Trump.
Trump, meanwhile, has support from administration officials who have long hoped to disentangle China from U.S. supply chains, Haefele noted, and many of the states hurt most by the tariffs aren’t prone to changing sides in elections. Still, Trump might back down “if the economic or political pain is perceived to be too costly,” he said.
That possibility isn’t fazing the president so far. Chinese negotiators thought that by targeting American farmers, they might force Trump “to negotiate a bad deal for the rest of the country,” he said in Japan. But “the American farmer — these are great patriots,” Trump said. “They are unbelievable people. And they’re with me, 100%.”
