How Trump's Tariffs May Affect Your Portfolio

March 08, 2018

 

Donald Trump's tariffs are believed to be what has cost him Gary Cohn, his top economic advisor. What will they cost you?

 

Hello, my name is Paul Carroll. I'm the CEO and founder of Efficient Wealth Management, a boutique wealth management firm. The president has done one of the few things in his power to actually move the stock market. And by imposing tariffs, he has hurt the market. The global tariffs he's recommended are 25% on steel and 10% on aluminum imports. The Wall Street Journal has candidly stated this is a folly, and I agree. The politics of tariffs result from a fundamental misunderstanding of both trade and trade deficits.

 

The first of ten points I'd like to make is that due to taxes and transfer pricing, trade deficits are always exaggerated. If they weren't, they would offset globally to a net of zero, and that is certainly not the case. Almost every country has a “trade deficit,” and yet that doesn't make sense.

 

The second point is David Ricardo's theory of comparative advantage, which is certainly not intuitive, states clearly that if two countries have different strengths, both benefit from increased trade.

 

The third issue is though there's an overall benefit for both nations, some will lose out, like steel workers. Economists agree, however, that it's much better to redirect some of the gains from trade than to punish trade. Paul Ryan, the House speaker in fact, is to be commended for speaking out against the administration on this issue.

 

Fourth, a key risk of this is a tit-for-tat trade war. Already, the European Union has announced tariffs on key American products, such as Harley-Davidson motorcycles, Kentucky bourbon, and other producers, all in retaliation for these proposed tariffs.

 

Five. A recognition of the cost benefit of both trades and the hurt of tariffs is one of the general agreements on trade and tariffs that exists.

 

Six. And yet an additional risk to GATT is using national security as a loophole around GATT—a loophole that is unfounded, as was evidenced during both World War II and the Cold War. By doing this, they have increased the risk that other countries will pull the same card in the future.

 

Seven. Today, the impact of these tariffs will be amplified by the global supply chain. Parts go in and out of many countries. It may originate in China; end up in Mexico; come through the United States, where a lot of value is added; and then [be] sent to Germany to be put in a car. It is impossible for a tariff not to hurt the home country. In fact, solar tariffs, though they benefited our weaker solar panel firms, have hurt ten times as many workers in our domestic solar panel installation companies. Steel tariffs will make US-made cars more expensive.

 

So, point eight is that our exports, due to increased costs and tit-for-tat tariffs, will be hurt.

 

Nine, cost push inflation will spike and likely further increase interest rates, hurting both the stock market and bond markets.

 

So my final point is that no one wins a trade war. Call it mutually assured economic destruction, and as such, this is bad policy, which is probably why Gary Cohn left the White House.

 

We wish you the best of investing success.

 

Sources:

 

Rekenthaler, John. “Trade Wars and Tariffs.” Morningstar.com, Morningstar, Inc., 7 Mar. 2018, www.morningstar.com/articles/854182/trade-wars-and-tariffs.html.

 

Wolf, Martin. “Donald Trump’s Trade Follies Presage More Protectionism.” Financial Times, The Financial Times Ltd., 6 Mar. 2018, www.ft.com/content/995063be-1e0a-11e8-956a-43db76e69936.

 

Donnan, Shawn, and Sam Fleming. “Gary Cohn Quits after Losing Trade Battle with Trump.” Financial Times, The Financial Times Ltd., 7 Mar. 2018, www.ft.com/content/56e349a2-2192-11e8-a895-1ba1f72c2c11.

 

“Gains from Trade.” Wikipedia, Wikimedia Foundation, 28 Nov. 2017, en.wikipedia.org/wiki/Gains_from_trade.

 

F., J. E. “Gary Cohn Resigns as Donald Trump’s Economic Adviser.” The Economist, The Economist Newspaper, 7 Mar. 2018, www.economist.com/blogs/democracyinamerica/2018/03/tariff-rifts-0.

 

Bloomberg News, et al. “What Market Players Are Saying About Cohn’s Departure.” Bloomberg Politics, Bloomberg L.P., 6 Mar. 2018, www.bloomberg.com/news/articles/2018-03-07/what-market-players-are-saying-on-departure-of-grown-up-cohn.

 

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