Trade Wars

April 9, 2018

Tariffs and potential trade wars have dominated headlines this last week. As the market tries to digest whether this is just rhetoric or a real possibility going forward, it is a good time to review some different facts and figures to get a good grasp of what is at stake.

 

The current U.S. administration has only imposed limited tariffs of 25% on steel and 10% on aluminum, which represents only 2% of total U.S. imports. In addition, they exempted many of the U.S.’s close allies such as Mexico and Canada, reducing the impact even further. However, in late March, the administration released a list of goods targeted at China which began a tit for tat stream of rhetoric between the world’s largest economies.

 

This marks a significant shift in trade policy from the United States if enacted. Since the 1930’s, tariffs have been on the decline and currently average only 3.5% of the total value of imports. This places the U.S. as the second lowest of the G-20. Since the second world war, the United States has led the global economy and has consistently been one of the least protectionist countries alongside the European Union.

 

 

 

Most economists believe that a full-blown trade war will be avoided. The last major tariff enacted was in 1930 under the Smoot-Hawley Tariff Act and is largely regarded as an economic blunder that exasperated the Great Depression. During its enactment, U.S. imports and exports plummeted by 60% as tariffs were enforced on nearly 20,000 various goods.

 

The rationale for enacting tariffs is to protect the domestic worker but with unemployment significantly below historical averages, the potential economic benefit is difficult to ascertain. The risk of a trade war mostly falls to the consumer as prices increase as many of the cheap goods the U.S. imports are cut off. This leads to an unfortunate scenario of reduced growth and increased inflation which could quickly put the brakes on the current economic expansion.

 

While the chances of a full trade war remain muted, it is important to keep an eye out for unintended consequences. As the world’s economy continues to grow, the U.S. traditionally has benefited as well over 40% of the S&P 500 sales occur overseas. If countries become nervous of potential supply chain disruption, U.S. companies could miss out on parts of the expansion.

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