Tariffs, Trade Wars & Markets
President Trump seems to be treating tariffs as his newest play toy and remedy to any real or perceived problem with another country – acting like tariffs are the tonic to cure all problems. As a result, countries will become less likely to feel confident that negotiation with the U.S. have any lasting value. We, as a country, need to be careful that we don’t “tariff” away our ability to be taken credibly by both friend and foe.
The concept of free trade is built on the principal that the trade will be beneficial to both parties and no one party will gain advantage through the help of an outside entity; i.e. government intervention. While countries may agree on the principal, the definition of unfair advantage is defined differently by each country. Generally, these issues can be worked out without resorting to imposing tariffs on a tit for tat basis. Lasting and damaging trade wars most often come when two entities of similar economic power become locked into intractable conflict – we seem to be at the beginning of such a struggle with China – a battle that pits two evenly muscled opponents.
There are indeed very serious issues in our trade relationship with China and with other countries. The protection of intellectual property and a corresponding open market are critical trade items to resolve. In certain cases, the imposition of large tariffs may be a necessary part of resolving trade disputes. However, regardless of whether the tariffs are necessary or not, trade wars have consequences. Some of the consequences can be predicted and expected; however, there will undoubtedly be unexpected consequences that are difficult to predict. It is the uncertainty of the future that makes market participants nervous and in turn those nerves will make the financial markets jittery.
We are going to keep our exposure to the stock market in place right now. Interest rates have come down dramatically in response to the uncertainty in the world on both the economic and political fronts. We are concerned regarding price inflation as a result of the implementation of tariffs – as such, we continue to feel that interest rates will ultimately move higher as we get past the “safe haven” phase of the current environment. Therefore, we are maintaining our cautious stance toward fixed income investments. We have entered a phase in which political events are having a larger than usual impact on the global economy. We anticipate a higher degree of volatility in the markets and would suggest that seat belts be fastened as we work through this period of uncertainty.
Enjoy the summer season!