Tariff Talk
Protectionism: Breaking Down the Trump Tariffs
Written By: Philip Lockwood
It is hard to turn on a television or radio today without hearing about the current tariff standoff with China. Some will call it a trade war, others call it mere economic warfare, no matter the name it is the U.S. consumer who bears watching. Consumer spending accounts for more than two-thirds of economic activity in the U.S. New tariffs tend to leach into corporate profit and potentially spur inflation. We have already seen automakers like, General Motors, revising downward financial forecasts, in part because of tariffs. General motors claim tariffs will lead to fewer jobs, lower wages, less investment in the future and price tags on its vehicles higher by thousands of dollars.
The other side of the coin is using the threat of tariffs to result in much needed trade reform. With a focus on the U.S. and China currently locked in a standoff the question begs of which country will give in first. I’ll rephrase that to, which country can better afford to stand firm before companies and consumers begin to suffer, and how long will it take to get to that point? China sells many more goods in the U.S. than the U.S. sells in China and China would have more of an incentive to give a little as it pertains to trade reform. As we have seen in the Midwest Soybean farmers and Pork producers have seen major losses as a result of the retaliatory tariffs from China, but the President has vowed to take care of farmers and proposed a 12-Billion-dollar economic package to help the farmers hurt by the retaliatory tariffs.
The U.S. is locked into 3 major trade feuds. We are exchanging tariffs and retaliatory moves with China, attempting to rewrite the terms of NAFTA and appear to be winding down tensions with the EU that began with U.S. tariffs on steel and aluminum exports. With all of that there is currently no immediate economic signal that the U.S. economy is about to contract due to these trade wars.
What do tariffs mean for the U.S. consumer. On the consumption level tariffs normally will result in a short-term price increase. The historical reason I say a short term price increase is because a few things normally will take place to help ease the pain of tariffs; sellers tend to absorb a portion of the tariff (lowering profit margins), consumers can substitute away from imported goods affected by higher tariffs to purchaser cheaper alternatives, and finally retaliatory tariffs by other countries generally make exporting more difficult and tend to increase the market supply, lowering the cost of domestically produced goods. A good analogy would be to look at gas prices, if higher gas prices are viewed as temporary then they will not change the habits of individuals, if they are viewed as long term consumers will purchase smaller more gas efficient vehicles or turn to electric vehicles.
Tariffs are something I am keeping a close eye on as we move forward, I don’t believe tariffs alone are a reason to alter the course of your specific portfolio. I am more concerned with a flattening yield curve, future growth expectations, and the solvency of companies with very high debt ratio’s who have been borrowing large sums of money because it is currently “cheap”. I will touch base on the yield curve and its’ potential impact on investments in September.
Philip lockwood | Founder + Managing Partner |
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Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC
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