Financial Planning for May 2018
Impact of International Trade Tariffs
In March of this year, the Trump Administration made good on campaign promises by announcing a new global trade policy that it believes will better serve Americans. Specifically, it features:
Over the past few decades, more goods and services worldwide have been allowed compete with domestic products and services sans taxes. This increased competition resulted in lower prices for consumers, enhanced productivity and efficiency, and increased revenues for manufacturers. However, it also led to a substantial loss of jobs as some U.S. companies moved manufacturing operations to other countries to take advantage of reduced labor and overhead costs.
The reason President Trump is in favor of new international tariffs is because he believes it will reduce the number of imports into the United States and encourage companies to produce more goods domestically – thus restoring lost jobs.
However, the outcome is not likely to be this simplistic. While the tariffs might provide a boost to American companies that produce aluminum and steel, the reality is that the United States does not currently produce enough of these raw materials to meet demands across a multitude of industries. This means many companies will have to import aluminum and steel and pass on the cost of those tariffs to consumers via higher prices. Once those raw materials are integrated into the production of U.S.-made products, such as automobiles, higher consumer prices could make them less competitive than foreign automobile manufacturers.
Economists have surmised that the steel and aluminum tariffs alone could disrupt economic growth in key industries such as automotive manufacturing, chemicals, and oil and gas production.
However, the trade news doesn’t stop there. The announcement has already triggered retaliatory tariffs from China, while other countries such as Canada and those in the European Union have indicated they might levy retaliatory tariffs on American-made products. This will further hurt American companies by disrupting our export market. Farmers, in particular, have indicated they will be heavily impacted. In 2016, China – the largest buyer of U.S. agricultural exports – paid more than $21 billion for our farm products.
When the trade tariffs were first announced, investment markets experienced a drop before returning to normal levels. Stocks have since wavered back and forth on a day-to-day basis, but pundits attribute this more to market fundamentals than a reaction to potential trade wars.
Longer term, tariffs are likely to impact certain industries more than others, affecting both revenues and stock prices. However, higher consumer prices can also affect bond investments. If trade tariffs trigger higher inflation, the Federal Reserve might accelerate its planned increase for interest rates. In turn, new bond issues will have higher coupon rates, which would devalue existing bonds with lower yields.
It is worth noting that the Trump Administration has indicated it is open to negotiate new trade deals on a country-by-country basis to amend the international tariffs and strike a better bargain for U.S. companies. Initially, the United States granted a number of temporary exemptions, including to the European Union. However, if no agreements are reached the taxes are scheduled to begin on May 1.