For the past month we’ve experienced a roller coaster ride of volatility because of a potential trade war. The Trump administration recently slapped broad based 25% tariffs on steel and 10% tariffs on aluminum. Even though most countries are exempt, large trading partners like China are not. China has since responded by adding tariffs to a variety of American goods. After Trump proposed additional tariffs China hit back with a list of its own. Finally, on Thursday evening, Trump proposed another $100 billion in tariffs after China’s aggressive response.
Beijing is planning to “counterattack with great strength” if Trump actually implements these new tariffs. At this time we’re talking about proposals, not actual taxes quite yet. Trump is leaving several weeks of time for negotiations and public input before acting. If implemented, the tariffs will begin phasing in later this May. The escalation is frightening markets as investors fear higher prices for goods. Tariffs are essentially taxes on foreign goods and implemented to protect domestic production. Unfortunately, like most taxes, they tend to slow the economy down. Even here in northern Indiana, manufacturers are concerned higher steel prices will lead to lower RV production.
Higher prices inevitably lead to fewer purchases and eventually a slowdown in production. We’re not there yet but the economy could very well slow down. Trade disputes coupled with higher interest rates could be devastating. However, I don’t think investors are taking into account Trump’s personality or negotiation tactics. If we go back in time to the 2016 campaign cycle Trump proposed torturing terrorists and then going after their families. In reality this meant we’re simply going to be tough on terror. Trump wanted a 15% corporate tax and landed at 21%. He wanted to repeal ALL of Obamacare but only ended up repealing the individual mandate.
Trump explains his negotiating tactics in his numerous books and interviews. Propose something absolutely insane and end up somewhere in the middle. He discusses this as part of negotiating from a “position of strength”. He then conjures up media controversy to keep people talking. Trump claims there is no such thing as bad publicity. Therefore, given the information in his books, his current policies, and day-to-day activities; the prospect of an all-out trade war is unlikely. Trump simply wants to get China to the table so we can have more reciprocal trade. He understands how $3-500 billion in trade deficits is not sustainable. Over the long run investors should do just fine and both countries will be better off.
DISCLAIMER: I am not a licensed investment advisor or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.