That’s a consequence of not just the impact of the retaliatory tariffs China has imposed but also because the costs of US companies producing goods for export would rise and make them less competitive in international markets.
If the trade conflict continues or worsens,of course,US consumers will face higher prices and/or US companies will make less profit.
The stock market shudder signals how sensitive it now is to the trade tensions.
Within the overall market,tech stocks were sold off particularly heavily,with the Nasdaq index ending the day down 1.63 per cent after falling almost 5 per cent earlier in the day.
Amazon finished down 6.3 per cent after falling as much as 8 per cent earlier,Google’s parent Alphabet closed 4.5 per cent lower after plunging 8.7 per cent and Facebook was down 2.3 per cent at the close after it fell 6.3 per cent within the day.
The savaging of the tech stocks – Amazon has now lost about $US230 billion of its market capitalisation this month – may have a trade flavour to it but there was another quite specific reason for the extent of the falls overnight. It’s one that demonstrates that the US and its companies can also be impacted by unilateral decisions taken elsewhere.
Within the UK budget on Monday wasa go ahead for a 2 per cent tax on the UK revenues of technology companies with global revenues of more than €500 million ($900 million) a year. The tax would be imposed from 2020.
Similar to a plan being considered by the European Union – and Australia – the big tech companies would be taxed on the revenues they generate from services like social media platforms,digital advertising and search engines.
For the technology companies,they are being squeezed on two sides.
Countries within Asia and Latin America are also considering versions of the tax on the big tech companies even as the Organisation for Economic Co-operation and Development is trying to develop a consensus among developed economies,by 2020,of how to respond to the diversion of taxation revenue occurring in the digital age.
Sophisticated profit-shifting by companies whose major asset is their intellectual property has resulted in them paying little,if any,tax in countries where they generate substantial amounts of revenue.
For the technology companies,they are being squeezed on two sides.
China is,as it is for many US multinationals,a major link in their supply chains. If the Trump administration were to impose the remaining $US257 billion of tariffs they would face materially higher input costs and either reduced profits or lower sales.
At the same time they face the prospect of being taxed quite heavily – which could translate to billions of dollars of increased tax revenue a year for a relatively small number of companies – outside the US.
The UK move,and a EU announcement expected before the end of this year,aren’t likely to be well-received by the Trump administration and could open up the threatened"western’’ front in the trade wars.
Trade wars might,as someone once said,be"good,and easy to win’’ but the New York Fed’s analysis suggests there is no meaningful prize for the winner while the market’s treatment of the tech stocks and,indeed,US companies more generally says even if there were a"winner’’ there could be big losers within its ranks.