Trade Tariff Talk Tantrums Market Update for June 18, 2018

TRADE TARIFF TALK TANTRUMS

Here we are again. We are in trade tariff talk tantrums with Canada, Mexico, Europe and China. Some of these tariffs have been implemented and others appear imminent. This begs the question, what are these tariffs anyway? What should I do about them? And, how impactful might they be.

For those who did not read our previous commentaries, please see the March 23rd edition of Reed Between the Lines or our Spring Market Commentary for definitions and interesting historical views of tariffs, including facts about their origin in 1789 and how they contributed to the Great Depression.

Just last week, President Trump withdrew from a G7 communique after allegedly making progress on trade with our closest partners. That was followed by an announcement Friday (June 15th) that we would impose previously imposed tariffs on China. This seeming off-then-on-again routine causes some to wonder how permanent the tariffs will be – as if they are inflatable for negotiation’s sake.

Let’s look at two potential implications.

POLITICAL IMPLICATIONS

Canada’s, Europe’s and China’s tariff responses are directed at industries and corresponding states that voted in favor of Trump in the past election. We believe that the administration will realize that it cannot afford to abandon the economic gains made by tax policies with a potential tariff-created recession. Furthermore, with mid-term elections upcoming, this will be a lightning rod that many may not want to touch. Then again, who would have forecasted all our current geo-political drama?

Among the hardest hit would be farm states such as Iowa, South Dakota and Nebraska, which rely heavily on exports of grains like soybeans and corn, along with states like Wisconsin, Michigan, Indiana and Ohio, which are major producers of a variety of other impacted goods. These states and others that will be negatively impacted turned out for President Trump in the 2016 presidential election. And, in recent weeks, Democrats have been winning in various regular and special elections in districts that Trump won handily in 2016. Currently, odds makers have the House up for grabs.

INVESTMENT IMPLICATIONS

From a fundamental perspective, these tariffs in isolation are not that impactful relative to the size of our economy and are counterbalanced by recent stimulus packages. The following exhibit shows a potential negative impact of $81.5 billion being offset by approximately $800 billion in fiscal stimulus, including recent tax cuts, government spending and corporate tax repatriation.

This is not to say that Mr. Stock Market will pay attention to these facts. Markets can be very irrational. The market yawned last Friday after the China announcement, but world stock markets are lower today (6/18). Here in the U.S. we are set to open lower this morning as more start to worry about the eroding effects of trade tariffs and wars.

Going forward, tariffs need to be closely monitored for their true impact – good and bad. We find some comfort that these tariff announcements and implementations may just be posturing and short-lived. And while it is apparent that we need to take a stronger stance against some of China’s bad trade practices, we are hopeful that this will be addressed through direct negotiations and by the World Trade Organization. Stay poised.

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