Trade Wars! What Is New?
Trade wars are typically a weapon of last resort after discussions and negotiations have failed to produce a satisfactory result. Essentially, it is entering a game of chicken with your trading partner(s). The hope is that by making their products more expensive, by imposing tariffs, you can “level” the competitive playing field and allow your side to improve their production capability and capacity and remove what is perceived as an unfair subsidization of the product by the other side. The “chicken” part of this strategy is that your side will be able to increase their ability to provide the goods sooner than the absence of the goods starts to cause economic problems. While the side that has tariffs imposed on their products is going to be tested to see if the decrease in revenue for their products is so painful that they agree to change the issues that cause them to have a perceived unfair advantage.
The Cost Of War
While it can make for good press to tweet/shout out that we are going to initiate tariffs and right all the wrongs that come from unfair trade practices. It is important to remember, that all wars have a cost to them. So, as President Trump prepares to impose tariffs on foreign made steel and aluminum let’s consider for a moment a few of the potential costs to tariffs and trade wars.
Other countries, to retaliate, impose their own tariffs on either the same products or some other product that is meaningful to our exports.
The price of the goods on which the tariff is imposed go up, often significantly, resulting in a higher cost of living for those of us who use the products. In this case, think cars, appliances, planes, homes, beverage containers – anything that uses steel or aluminum.
Relationships with our neighbor countries, including our allies, deteriorates. No one likes a sneak punch in the gut. When we get blindsided by a punch in the gut, our willingness to trust or interact with the puncher tends to diminish. This is particularly applicable in this case as there does not appear to have been any formal negotiations or discussions on the topic with our trading partners.
Countries that have been affected by the tariffs band together and create their own trading partnerships and exclude the U.S. from the most favored nation status – resulting in decreased trade opportunities for the U.S.
In most relationships, business, trading partners, neighbors and so on there are times and circumstances in which one party or the other can argue that an unfair transaction has occurred. Normally, we enter into discussions and negotiations to air our grievances and seek a settlement that helps to remedy the perceived wrong. Sometimes boycotting or cutting off the relationship is the result of the negotiations. When the boycott or termination of the relationship occurs suddenly without discussion, it often results in distress to one or both parties; certainly, at the very least, trust is eliminated from the relationship. In our economic world there must exist a certain amount of trust or reliability in order to facilitate economic growth. When one partner suddenly and unilaterally announces a tariff and suggests that a trade war is the solution to any existing grievances on their side without consulting their partners, it is cause for concern.
Financial markets do not do well with uncertainty – economic, political, social and even with the threat of trade wars. We expect the threat of trade wars combined with higher interest rates and the prospect of interest rates moving higher will cause additional swings in the capital markets. We have chosen to reduce our presence in the fixed income or bond markets by an additional five percent; but, are leaving our stock exposure at a fully invested level for now.
Thank you for the opportunity to work with you.