'American importers...pay for tariffs,' says economist

see where things go from here but obviously the trade tensions between China and the US weighing heavily on the market to start the week and this comes as President Trump weighed in on the trade tensions earlier today took to Twitter to tweet saying quote China dropped the price of their currency to an almost historic low it's called currency manipulation are you listening Federal Reserve this is a major violation which will greatly weaken China over time joining us to discuss this now is Milken Institute chief economist William Lee and William I'd like to get your thoughts on what the president said there as he lays it out currency manipulation is that really what's going on here well it's clearly China's policy to let the markets determine where the exchange rate is and the markets been pushing the room to be weaker and weaker the policy move comes in how they did it they let it overnight jump by almost 290 pips and that's quite a bit in one night they've been gradually letting us go but now that they actually did it in one night is almost a statement that says you know you slap tariffs on us we can offset it and we and allow the exchange rate to offset it so that that is a is raising the policy tensions between the US and China servelet yeah it's almost as if they wanted the biggest market move they wanted the u.s. to feel the pain that they're feeling here but President Trump also expanded on it here saying that based on the historic currency manipulation by China it is now even more obvious to everyone that Americans are not paying for the tariffs they are being paid for compliments of China and the u.s. is taking in tens of billions of dollars China has always used currency manipulation to steal our businesses and factories hurt our jobs to press our workers wages and harm our farmers prices not anymore what's the potential impact if these tariffs go through though is the question we're asking today and obviously we should lay out here but that's not the case we've highlighted on the show how tariffs work we know that the producers manufacturers past prices price increases long to consumers but I'd be very curious to get your thought on kind of how this plays out now that the Chinese have made their move and Trump still Wang potentially increasing the tariffs applied to Chinese goods one of the things that the comments have gotten wrong has been the timing of how these price increases has taken place the textbooks say that it Sue's you slap a tariff on consumers are going to have to pay essentially the full brunt of the terrorists and we haven't really seen that that if you look at the price of imported goods they really haven't increased that much and now that the remedy has been devalued there's less pressure to increase prices so one of the things that we have to be very careful about is the timing of these price increases yes American importers cut the check to pay for the tariffs no question about it but now what do the American importers do do they force the Chinese supplier to absorb some of that do they force some of the American suppliers to absorb some of that Walmart's profit margins shrink or is it that ultimately the consumer bares all of it and that's the unknown question and that's something that we have struggled with trying to estimate and the best estimates I've seen are come out of Germany of all places because they really have a very detailed model of how these things work and they estimate that 70% of the tariff burden ultimately falls on the Chinese so there's a lot of controversy here but nevertheless it's very true American importers cut the check to pay the tariffs what happens afterward is what the debate is all about the only brian chung here so China has said that it doesn't want to weaponize the currency so I guess my first question is would you describe them actually letting market forces to take the USD - Chinese un - above 7 would you describe it as weaponization and if not what would be proper weaponization would that be something like playing with their current holdings of US Treasuries for example if they really want the weaponize right then you're absolutely right it would be much more aggressive and pushing that exchange rate and and I think what they've done as I said overnight has been to show that they can weaponize and to the extent that we didn't even imagine before that they can let the exchange rate go now one of the things that they have to struggle with is if they do let the exchange rate go their domestic residents that are holding or you know we're going to be assets are gonna say my god this stuff is worth less relative to other global assets so there's to be a massive capital outflow and that's what they were afraid of in 2015 that caused them to really stop weaponizing the exchange rate and that's the thing that's trying and struggling with is that they want the remedy to be a global national and global currency that people use for trade all over the place right the internationalization of remedy has been a policy for the Chinese for decades if they actually weaponize it it'll turn against that policy and turn into a national local currency and that's exactly not what they don't want hi this is Carlton English going back to Trump's tweet from earlier today about how he called out the Federal Reserve how do you see you know this renewed tariff tension you know actually possibly forcing a rate cut earlier today you know it seemed almost certain that there's going to be some sort of cut coming in September with something even that's 50 basis point cut people were hoping for is on a table you know this is like a kabuki dance between Powell and Trump you know in all the press conferences Cher Powell has been saying trade tensions and trade uncertainty has raised the level of drag on the global economy and that is going to influence how we look at the US economy and then Trump essentially said all right you think trade uncertainty is what's gonna get you to move your interest rates I'm gonna give you more of it and and and so so I think what President Trump is really trying to do is to get the rates down on the short end because that is what the the Federal Reserve can control but also remember the long end the ten-year Treasury the 30-year Treasury is dropped down to one 70s now because the global interest rates are also incredibly low I mean we have Europe and Japan negative rate territory we have about 14 trillion dollars worth of assets with negative yield so the US having such high long-term rates is incompatible and really misaligned with the global economy and the long rate really it has to come down or the dollar has to appreciate like crazy which is something that not nobody wants but I mean when we're looking at this right I mean you're laying it out there and we're just taking a look at the tenure now down to one 1.73 but when you look at it i mean where do we go from here because you're laying it out the way that President Donald Trump wants this to play out you're talking about how he's gotten the rate cut he was looking for you're talking about the brunt of the tariffs being applied at least in the data you were pointing to they're being felt by the Chinese producers so I mean you look at this I mean he's got the election in 2020 but are you saying the president Trump is playing this exactly how he should be playing it when you look at a trade war from a political perspective it's imprisoned Trump's interest to delay the agreement until the time of the of the election because he wants to bring home a victory right just before the election the victory for him is gonna be defined as more AG purchases and more industrial goods all the stuff about about intellectual property and and and market access is something that essentially helps the California economy right because it's it's Silicon Valley that benefits most from that and let's face it he's not likely going to get California in his electoral basket so so from a political strategy point of view he'll delay the hard items until after the election if he gets reelected and and and he's hoping to bring in their short-term victories in Ag and industrial products that'll help him with Ohio and the bomb-bay sure to time that out too right before you get to 2020 but on the flip side I mean when we're talking about the consumer pain being felt here a lot of the tariffs haven't really hit those consumer facing products and that's going to be paying at least in the short term if these go into effect in September as the president has talked about so I mean in your mind maybe the time to apply this the pressure would be right now so jumping from he said 10% it could go up to 20 right now in your mind are you expecting that and if you are what kind of market reaction could play out if finally the consumer sentiment is finally dented the consumer sentiment right now has been holding up strong because he did essentially the data have not shown these price increase to affect the ultimate consumer is to hit everybody in between but not the consumer yet and that's why the consumption is so strong in the economy when everyone says we don't need a rate increase they're all referring to the consumer but if you look at where the future of GDP I've been a forecaster my entire professional life and one of the things we always look at is where's investment going because investment determines future hiring future productivity and future real wages and real incomes investment is crashing not only the United States but around the world said that's the thing that I am most concerned with that's why I and other people of this court in the forecasting game are very concerned that we need to have a policy backstop to reassure confidence among producers and investors that we need capex that we need it now and it's a to do it now that's something the Fed has failed to do to say that we're there to back up the economy no matter what right he did chair Powell has not come out with a Draghi we'll do everything at takes two backs off the economy and if you were to do that I we would have much more solid growth going forward all right there you go William Lee laying out the case for Jerome Powell to step up a little bit stronger thank you so much for taking the time appreciate you weighing in with us sir