Fair Trade

Clients have frequently asked about how tariffs might affect portfolios.  The concern is understandable.  I think most all of us would agree, tariffs are generally bad, and are an additional tax on consumers, which slows the economy.  At the same time, uneven trade deals are not good for the US.  The addition of steep tariffs has large risks, as the current administration negotiates with other countries toward more reciprocal deals and tries to reduce/eliminate significant trade imbalances.

The US consumer market leads the world.  Companies and countries need access to our markets, but in the past we have allowed trade deals that tolerated cheating on agreements.

Examples of this are:

1. China’s currency manipulation, which made their products more competitive,

2. Europe’s financial support of AirBus, which allowed it’s jet’s to be less expensive than Boeing,

3. Many countries acceptance of intellectual property theft from movies to handbags and corporate espionage.

Past administrations tolerated these transgressions in an effort to get along better with the world and because it seemed we could afford this stealth tax to our economy.  For over 20 years, back to when Trump was a professed Democrat, he has railed against this unfair playing field.  While many dismissed these comments, he seems to believe in free trade, but only when it’s reciprocal.  He might argue that as these countries biggest customer we should be getting a better not the worst side of the trade deal.

We know these tariffs are controversial. However, if we are going to pursue this approach, now seems to be a pretty good time.  If you are going to pick a fight, you want to do it when your economy is doing well.  While the markets have been largely flat this year, Gross Domestic Product (GDP) for the US appears to be strengthening.  The US has been running on an anemic 1-2% GDP for the last 10 years or so.  The most current estimates for 2018 show GDP at 4.1%, thanks to a pro-growth drum beat and the most recent personal and business tax cuts.  4%+ GDP was said to impossible for the US as recently as a year ago.  Economists have estimated that to pay for the 2018 tax cuts, GDP needs to be at or greater than 5%, so we appear to be making progress.

While it’s still early, if you are wondering who is winning this spat, one can look at two measures.  The price of the Yuan (China’s currency to the US dollar) has fallen dramatically and China’s stock market is off by about 10% recently, while the value of the US currency has risen and markets have remained stable.  In the end, it’s a war of attrition.  Additionally, the EU trade commissioner came to the US saying, “our intent was to make a deal”.  While the details are still being worked out, the deal appears to be more fair, working towards no tariffs on either side, no government protection for industries or companies.  This deal will put more pressure on the other countries to capitulate as well.

In general, we expect that tariffs are intended to be a short-term negotiating tactic, working to play countries against each other to create more equitable deals.  It might not work, which could be destructive to our and the world’s economy.  But if it does work, the world will have more fair and better trade than it ever has.  That’s good for all of us. Short term pain, for long-term gain.


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