Tariffs, Trade Wars, and the Financial MarketsSubmitted by Bernhardt Wealth Management on April 9th, 2018
You may have noticed that tariffs have been in the news and have been blamed for the recent stock market volatility. Last month, President Trump announced there would be tariffs on Chinese imports with the intention of penalizing China for what are characterized as wholesale theft of US intellectual property and unfair treatment of US firms doing business in China that puts them on a very uneven playing field with their Chinese counterparts. The president’s announcement on China follows on the heels of his announcement earlier in March of his intention to place steep tariffs on US imports of steel and aluminum.
The president’s decision has occasioned considerable displeasure, both internationally and in the U.S. Foreign governments have asserted that if the US follows through on levying tariffs on their exports, they will respond in kind, setting up the scenario for an escalating trade war. Here at home, many of the president’s own GOP have expressed disagreement with these moves, since they run counter to the principle of free trade, a hallmark of conservative economic philosophy. Several large American retailers, including Wal-Mart, Apple, Best Buy, and others have sent a joint letter to the White House, warning that the effect of the tariffs on China would be to raise prices for American consumers.
For individual investors, the prospect of a trade war also carries the worry of its effect on the financial markets similar to what we have seen. If there’s one thing that the financial markets dislike, it’s uncertainty. Although underlying economic fundamentals are strong, both in the U.S. and abroad, the unforeseeable consequences of an all-out trade war would likely foster a jittery climate in the financial markets, making them more susceptible to negative price movement in the short-term.
It’s important to understand that the fallout of a trade war--increased prices for basic goods like aluminum and steel and also for consumer electronics and other categories where China has a strong manufacturing presence--would probably go beyond the companies directly engaged in producing the goods on which the tariffs are levied. The effects would ripple throughout various industry groups--auto and heavy equipment manufacturing, construction, tech companies, and even health care, all of whom relay on components or materials that would become more expensive in the face of escalating, retaliatory tariffs. If the conflict becomes widespread enough and goes on long enough, it could even become a drag on worldwide economic growth, the very engine that has been powering the equity markets for so many months now. All of these concerns have factored into the U.S. stock market’s recent volatility.
It remains to be seen how severely the president’s announced intentions will affect the markets. In fact, as of this writing, many say not to worry as this is a negotiating ploy. They remind us that the announcement of the aluminum and steel tariffs was followed by the granting of exemptions to Mexico and Canada--the two leading exporters of steel and aluminum to the US--and possibly other countries. In other words, the overall economic effect of those tariffs was not as great as it sounded when first announced. It is possible that something similar could develop in the case of China.
In the meantime, investors should continue to expect some volatility in the markets as the ramifications of international trade disagreements gradually come into focus.