Fundamentally, the topic of tariffs is good. Government leaders implement tariffs on foreign products and services to restrict imports by tacking on additional taxes or fees. The aim is to make foreign products less attractive to domestic consumers.[i]
Establishing tariffs, proponents argue, helps correct trade inequities and boost domestic production and growth. Proponents assert that well-targeted tariffs foster fair trade and create a more open and robust international marketplace. Tariffs may be bitter medicine in the short run, they say, but their long-term effect is to level the financial playing field.
Opponents, however, argue that establishing tariffs is a highly arbitrary fix to flaws in a very complex international market that will lead to unnecessary and unproductive trade wars that historically have ended tragically. While rectifying apparent inconsistencies and unfair trade practices by some nations, enacting tariffs is viewed as an onerous tactic that is often misinterpreted by trading partners and thwarts growth on the global stage.
A better approach is diplomacy, opponents argue, adding that tariffs inflict too much pain on local markets. Proponents, however, counter that diplomacy has consistently failed in correcting or penalizing self-promoting offenders who have ignored international calls for fair trade. More stringent approaches are required to deal with obstinate trading partners.
What’s Going on Now?
President Trump has threatened to implement tariffs on nations to correct trade imbalances, unfair exporting practices and marketplace offenses. Trump imposed tariffs on Chinese goods as punishment for the country’s intellectual property theft. The U.S. trade deficit with China has reached a record high of more than $375 billion.[ii] Trump has also instituted tariffs on steel and aluminum shipments from Canada, Mexico, and the European Union.
Who Will It Help? Who Will It Hurt?
While national and global leaders clash over the merits and meaning of fair trade, how will all this heated financial discourse impact your investments?
First, who is expected to gain from the U.S. policy on tariffs?[iii]
S. steel producers stand to gain significantly. The 25% steel tariff makes a strong argument to go for domestic steel. Moody’s Investors Service gives it a thumbs-up.[iv]
The U.S. aluminum market has been growing with the implementation of tariffs. “These tariffs lay the groundwork for a stronger economy and industrial base,” said Alliance for American Manufacturing president Scott Paul.[v]
Foreign firms serving the markets affected by U.S. tariffs may benefit. Foreign competitors could seize opportunities in international markets in countries that retaliate against the U.S. policies.
Second, who is expected to get the short end of the tariff stick?[vi]
American whiskey exports may suffer. U.S. whiskey producers shipped $737 million in bourbon to Europe in the 12 months prior to March 31.
Harley-Davidson and other U.S. motorcycle manufacturers say tariffs will put the brakes on production.
Prices for beer and soda, in aluminum cans, may rise. “Over the long run, these tariffs will drive aluminum prices higher globally,” stated Beer Institute president Jim McGreevy.
Tariff Impact on the Stock Market
Tariffs—and the potential for a trade war—will loom heavy on the stock market, most analysts believe. But by how much, to what extent, and in what direction remains unanswered.[vii]
Major investors, at this point, are breathing a little easier, as the U.S. stock market seems to be adjusting to the news of the tariffs. Traditional wisdom suggests trade wars don’t produce positive, short-term results. However, Trump’s reasoning rests on the premise that vast trade imbalances favoring foreign countries has unfairly put the brunt of global economic development on U.S. shoulders.
While U.S. stocks have largely climbed to unprecedented heights following Trump’s “Tax Cuts and Jobs Act” and other economic incentives in late 2017 and early 2018, the market has undergone some remarkable shifts, including the sudden 12% drop in February 2018.[viii] The market trajectory had been relatively steady up until the February drop. Attempting to assuage worried investors at the time, analysts said fluctuating markets have historically been the norm.
Despite the political fury and the heated exchanges on the international stage, economists and investment analysts are unsure whether we’ll actually engage in a trade war or what kind it’ll be.[ix]
Many argue if trade disputes escalate, economic growth in the United States would slow by blocking supply chains, lowering commercial confidence, and increasing economic uncertainty.[x]
The bottom line for investors may be what the news media says about tariffs and the potential for trade wars and how the market responds.
“Markets are trading on headlines, but we’re reluctant to draw policy conclusions from posturing or headlines,” said Eric Wiegand, senior portfolio manager at U.S. Bank Wealth Management.[xi]
While the prospect of a trade war doesn’t bode well initially for the stock market, some analysts say to stay focused on domestic production.
“If trade wars do escalate, the entire market is going to come under pressure, but even in the ‘ugly’ scenario, sectors with a domestic U.S. focus should at least outperform the broad market,” stated Tom Essaye, founder of The Sevens Report, an investment research firm.[xii]
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