“All things being equal, trade is a good thing, although it can also eliminate certain jobs and hurt some firms or workers. On balance, though, trade creates jobs and boosts the overall welfare of a country… Trade can be an engine of increased production, economic growth, development, and poverty reduction.” (1)
In 2018 I had several clients ask about what impact the proposed trade tariffs might have on their retirement plans.
On June 19th, 2018 the S&P 500 sank the most in three weeks with industrial companies getting hit hardest after President Donald Trump threatened tariffs on another $200 billion of Chinese goods, and the Asian nation pledged retaliation. (2)
On June 19th, 2018 Ellen Zentner, chief US economist at Morgan Stanley, shared her views on the impact of proposed tariffs on the US economy. (3)
“We expect tariffs to impact GDP by 1/10th of 1%. Now you may say so what, the economy has been sound, we are getting good data, But there can be cumulative impacts that start to build here… What about the next round of tariffs, and then the next round…”
She emphasizes, “the kicker would auto tariffs which we have ready to deploy…”
Zentner continues, “The impacts of tariffs build on one another.”
“How this plays out depends upon the responses from other leaders… I don’t rest easy, and I certainly don’t think anyone should rest easy.” Zentner states, “There is the risk that escalation never gets to that de-escalatory phase”
The first round of tariffs went into effect on July 6th, 2018.
In addition, Zentner points out there is risk that tariffs may cause a miscalculation by the Federal Reserve as it raises interest rates in the months to come. She explains, “One of the risks is If tariffs add to upside inflation, how confident can fed officials be that they don’t over react in raising rates?”
Tariffs may also short circuit some of the positive impacts of the tax cut for corporations, she explains. “From a business perspective, I may have just had my tax rate cut, and I might have had a lot of plans for the benefits from that, but perhaps I still hold off on some investment because I may be in one of those industries affected by tariffs, I might have uncertainty around my pricing structure, or I might have supply chain disruption, so I might hold back on some of that investment till I get clarity.”
Tariffs create uncertainty around how the US economy will perform in the months and years to come.
This uncertainty impacted the US economy throughout 2019.
Fast forward to 2020. In January of 2020 the US and China signed a first round trade deal and committed to starting talks for phase 2 of a trade deal. While this was seen as positive, it pushed the harder trade issues down the road, continuing the uncertainty which weakened US growth. However, that deal was soon short circuited by outbreak and spread of COVID 19.
In March and April economies around the world closed down and global trade came to a screeching halt. As the virus developed into a political issue domestically the administration blamed China. In this environment negotiations were cancelled and issues around Hwawei and TikTok took center stage.
In Richard Haas’ book “The World: a brief introduction”, the former diplomat examines international trade and future prospects. He writes…
“Trade and investment have been areas of great progress for some seventy years now. The volume of both has grown steadily and markedly, as once both a contributor to global growth and a reflection of it. The problem ahead is that the barriers to further progress are complex and addressing them will prove more difficult. New agreements will need to be negotiated and enforced… Identifying the answer is the easy part; putting it into practice so that people can continue to work will be a challenge.” (4)
The history of trade conflicts illustrates the risks.
Following the stock market crash in 1929 and the recession that followed, politicians passed the Tariff Act of 1930, commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff. The tariffs were intended to preserve American jobs as unemployment increased. (5)
Cato Institute, author Alan Reynolds argues that Smoot-Hawley was an ongoing drag on the economy.
By 1934 trade had fallen 61% and made economic pain suffered in the Great Depression much worse. The Smoot-Hawley Act was repealed in 1934. (6)
Trade conflicts can lead to unforeseen consequences. It is important to manage risks within your investment portfolio. To discuss options that may help you reduce risk please feel free to reach out to me at firstname.lastname@example.org
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- “The World: a brief introduction”, by Richard Haas, pg 215
- “The World: a brief introduction”, by Richard Haas, pg 229
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