30Jul

TARIFFS: WILL THEY THROW A WRENCH IN THE MARKET?

For years, the United States has held the distinction of being an economic superpower. We have been the world’s banking center, our currency has been the reserve currency for the world and English has been the language of international business. The U.S.’s economy dwarfs most and few countries were even a close second place in the past. China has had a goal of challenging all of these paradigms.

The world moves at such a fast pace today that many geo-political events, that should startle the markets only produce a yawn. The potential for a trade war between the U.S. and its many trading partners offers the prospect for getting Wall Street’s attention.

The introduction of tariffs came out of promises made on the campaign trail by the president. As a businessman, he had been dismayed for many years at what he saw as poorly negotiated deals between the U.S. and other countries. The country that stood out to him most was China. The U.S. buys 20 percent of all of China’s exports, yet our trade deficit in goods with China totaled $347 billion in 2016.

The president’s argument is that free trade only works when it is fair and the current trade imbalances hurt American farmers and manufacturers. It is difficult for an American consumer to shop for household products that are not produced in China.

The president proposed a 25 percent tariff on $50 billion of Chinese goods and the Chinese reciprocated. The Chinese have imposed new tariffs on U.S. goods such as soybeans.

The administration concluded that one of the first steps in leveling the playing field was to impose a 25 percent tariff for steel and a 10 percent tariff on aluminum on imports from the EU, Canada and Mexico.
The EU, together with Canada and Mexico, exported $23 billion worth of steel and aluminum to the U.S. in 2017.

Tariffs on Cars; a big deal?

In some sectors of the economy, a trade war may not have as significant an impact as assumed.

More than half — 56 percent — of all new vehicles sold in the U.S. in 2017 were manufactured domestically. Another 11 percent were made in Mexico and 11 percent were made in Canada, as well as another 11 percent in Japan. Only 15 percent of cars made in the U.S. and shipped to Europe are subject to the tariff.

Wall Street likes a steady-as-you-go environment and loathes periods of economic uncertainty or events that could impact sectors or industries that could potentially prompt a domino effect. These events introduce volatility into the market. A protracted trade war would do just that.

Some pundits see a positive side to a trade war. They believe that fears of the impact on some international tech stocks would cause a dip in the price of those stocks that could present buying opportunities. Because of its exposure to the Chinese market, Apple has seen its stock drop since the prospect of trade tensions have escalated.

Some analysts don’t believe the president would let a trade war go on long leading up to the November elections. So, they believe, that just the specter of a trade war alone might create a buying opportunity for some stocks.


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