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The interlocking international trade agreements crafted over the past several decades have all been threatened by recent abrupt changes in U.S. trade policy. Many countries seem to be in the business of threatening retaliatory tariffs, in the name of ‘fair trade.’ When countries engage in rounds of tariff-raising, it is called a trade war.
The human tendency is to expect current conditions to continue. We believe we must strive to think objectively about how things may change, assess possibilities, and be proactive in our decisions and actions.
We can seek to understand the impact of a tariff by examining the case of pickup trucks. The U.S. assesses a 25% tariff on imports of these vehicles1. In practice, this tax collects no money—it simply stops the import of pickup trucks.
Have you noticed how expensive trucks are, relative to cars? This benefits U.S. manufacturers at the expense of consumers, farmers, and businesses small and large which use trucks.
So generally the tariff has the effect of increasing consumer costs and reducing consumer choice, while making profits for a very few companies higher and reducing profits at all truck-using companies by a little bit.
Imagine if other countries retaliated by increasing tariffs on things made by Deere and Caterpillar and Boeing. This would be great for Airbus and Kubota and Claas, which would have less competition in the rest of the world. Foreign consumers, both individuals and companies, would pay more and have less choice. And workers employed in the U.S. by Deere, Caterpillar and Boeing would lose their jobs.
Forget for a moment which countries are charging how much in tariffs on which goods. Any increase, either by other countries or the U.S., increases costs on balance for consumers everywhere and reduces employment overall, in every country.
Typically, in a trade war the economy is depressed because consumers face higher prices so buy fewer goods. Production decreases to match reduced demand. Incomes are lower, jobs are fewer, and profits are slashed. This is why the stock market reacts to potential trade disruptions.
We believe the best approach to investing is to seek the best bargains and avoid stampedes in the market, with a very long time horizon. Chaos produces bargains and opportunities and stampedes; taking the long view may be the best hope for coming out on the far side in better shape.
Diversification may help, but will not eliminate volatility. It is not good fun to see portfolio values go down in the short run—but it is inevitable from time to time. Clients, if you would like to discuss this or anything else, please email us or call.
1Wikipedia, https://en.wikipedia.org/wiki/Chicken_tax. Accessed March 2018.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Global trade and international relations have dominated the news lately. The president signed a pair of sweeping tariff proclamations and issued a number of statements about trade.
Each of us has been mostly free to buy the goods and services we choose, regardless of origin. Chanel, Honda, Burberry, Adida, Mercedes Benz, Nestle, Armani, Samsung, Phillips, LG, Toyota, AXA, Bayer…these global brands earned their position because enough of us voted for them with our wallets.
If you are of a certain age, you remember when ‘fruits and vegetables’ meant about a dozen things. Now the produce section features products from dozens of countries.
Trade is not a one way street, either. Within forty miles of beautiful downtown Louisville, the small town of Valley Nebraska hosts Valmont. The company began in the irrigation equipment business in 1946. Today Valmont does business in one hundred countries on six continents.
Likewise, the farms surrounding these towns help feed the people of many nations.
Many of the most iconic American companies like Caterpillar and Boeing produce for the whole world, too. As with those international brands, they earned their position by being valuable to their customers.
We could buy Fords instead of Toyotas. And people in other lands could buy Kubotas instead of Caterpillars. But what would be the point? The U.S. and the whole world has steadily gotten wealthier and more prosperous by doing business in a relatively free system of global trade.
Because citizens of each country may or may not choose to buy and sell equal amounts to other countries, so-called trade deficits result. You have a trade deficit with the grocery store—week after week, you are in there buying things. Yet the grocery store never buys anything from you. This is not a problem, is it?
Trade has made us richer and our lives better. Less trade will make us poorer and life more difficult. (A trade war and collapse of trade was at the heart of the Great Depression, after all.) We are watching current developments carefully.
Clients, if you would like to talk about this or anything else, please email us or call.