On March 22,2018, President Trump announced approximately $50 billion in tariffs on Chinese goods in response to China’s intellectual property thefts, to which he added there is plenty more to come. China then retaliated with a smaller set of tariffs on U.S. imports valued at roughly $3 billion. The moves sparked fears of a broader trade conflict. China’s trade actions, however, came on the heels of several positive trade developments elsewhere, including some progress in NAFTA talks and additional exemptions for the recently announced steel and aluminum tariffs, notably with the European Union. Yet this trade battle is not over. The administration is expected to announce additional actions to protect U.S. intellectual property, including restrictions on cross-border investments and immigration, e.g., student visas. Though unlikely, should the trade “titfor-tat” escalate into a full-blown trade war, we could see a reduction in trade between the United States and China, impaired economic growth, and higher costs of imports that translate into higher prices for consumers.
It is important to put the size and scope of the announced tariffs in proportion to the size of the U.S. and Chinese economies. The announced tariffs cover less than 3% of all U.S. imported goods. Based on announced actions, the impact on the U.S. economy would be minimal. In fact, the damage to China’s economy would likely be minimal, too. Capital Economics estimates that the impact would be only 0.1% on China’s GDP because the tariffs affect only 10% of their exports to the U.S., and much of this trade is likely to continue because alternatives are limited.
If we compare the tariffs to the size of the stimulus from tax cuts and federal spending, plus the repatriation of overseas cash, Strategas Research Partners estimates $800 billion in stimulus (about 4% of GDP) is being put into place for 2018. In contrast, the two sets of tariffs just announced total less than $40 billion (the tariff percentages multiplied by the value of goods they are placed on). The tariffs announced thus far are just not big enough to derail the growth path of the U.S economy. There are other reasons for optimism:
- There is a comment/implementation period that may allow time for negotiations with China, so tariffs could be watered down. This period could stretch into late May, giving ample time for lobbyists to be heard and negotiations to occur.
- Comments from the Trump administration, and its handling of other issues, have suggested trade proposals may be moderated in negotiations. There are a number of examples when the administration has moderated initial proposals, including the border tax that was killed early in the tax reform negotiations last year.
- There are indications China is willing to negotiate in good faith. The Chinese Premier recently offered concessions, at least verbally, pledging to open up their markets, to protect intellectual property of foreigners investing in their economy, and to stop forcing companies to transfer technology to domestic firms. These comments, plus the fact that the value of China’s retaliatory tariffs was small, suggest room for compromise.
- Larry Kudlow could be a moderating influence. The newly appointed National Economic Council Chief is a noted proponent of free trade. However, other moderating voices of Gary Cohn and Rex Tillerson are gone. • President Trump cares about the stock market. Recent volatility has probably gotten his attention.
A series of protectionist announcements may weigh on investor sentiment in the coming months. Since we expect limited economic impact and manageable disruption to supply chains, we will look for opportunities to buy dips rather than sell into weakness. Small caps have held up well due to their domestic focus. We also think that emerging markets represent an opportunity.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Investing in stock includes numerous specific risks including the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
- Investing in small cap stocks are generally more volatile than large cap stocks.
- Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
- Data provided by LPL Financial, Capital Economics and Strategas Research Partners.
- All investing involves risk including loss of principal.