Tariffs, Trade Deficits and the Impact on Your Portfolio

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It has become increasingly impossible to read or listen to any financial news lately that doesn’t include some discussion of tariffs.  So, what are tariffs?  Do they even matter? Tariffs are a tax or duty to be paid on a certain class of imports or exports.  They are certainly not a new phenomenon as they have existed dating back to colonial times. In fact, the U.S. government was once largely financed by tariffs (represented in gold below). This continued until Federal income tax (represented in red) began after 1913 when the 16th Amendment was ratified permanently legalizing the ability to tax income.

Proponents of tariffs argue that they play a key role in protecting domestic employment, protecting consumers, as well as infant industries that otherwise might find it difficult to get off the ground if foreign competitors had their way.  The U.S. pencil industry is one example of which tariffs are viewed as saving pencil maker jobs in the U.S. by placing a large tariff (115% since 1994) on foreign-made pencils. 

Some also believe that tariffs can strengthen national security and provide a form of retaliation when needed.  With respect to retaliation, one example might be, if France believed that the United States was allowing its wine producers to call its domestically produced sparkling wines "Champagne" (a name specific to the Champagne region of France) it could consider placing a tariff on imported meat from the United States until the situation was rectified.  Another example that’s worth noting would be if the U.S. imposed environmental restrictions in the production of a product that resulted in higher costs to produce than another country which does not impose the same restrictions. This might enable them to produce and sell their competing product much cheaper, in which case, tariffs could play a role in protecting the more environmentally friendly company.

Today, the current administration and other entrepreneurs have spoken out arguing that it simply is not fair that China places a 25% import tariff on American cars, effectively restricting purchases of American cars abroad while at the same time, placing only a 2.5% tariff on Chinese cars sold in the United States.  Others have argued that trade deficits are not something the U.S should be concerned with or tamper with especially if it could lead to a trade war with other countries. 

At the end of the day, tariffs provide countries with some additional control that they may not have had otherwise with respect to the flow of goods and services.  Whether tariffs help or hinder an economy over the long-term has been an ongoing debate for which valid arguments have been made on both sides. Regardless, tariffs are certainly not going away anytime soon.  The million, billion, or trillion-dollar question is, what impact do these tariffs have on our economy and on investors as a result?  In 2017, the United States had a trade deficit of 566 billion which meant that imports of goods and services (what other countries build and sell to the U.S) exceeded exports (what the U.S. builds and sells abroad). But this deficit is nothing new.  In fact, the U.S. has owned the world’s largest deficit since 1975 and has been trending upward much of this time.  It is very difficult to quantify just how much this has dampened growth in the U.S. if at all.

With respect to the markets, for the 2nd quarter of 2018, we did experience some equity market volatility that most likely was a result of geopolitical tensions and talks of a trade war. The U.S. equity markets, however, did demonstrate some resiliency through all of this and remained on the positive side.  Domestic equity indices were positive for the quarter: S&P 500 up 3.4%, Russell 2000 up 7.75%, and the Dow Jones US REIT Index came roaring back, up almost 10%.  Non-U.S. markets, however, were a different story, with International Developed Market stocks down slightly, 0.75% with Emerging Markets taking the hardest hit - down almost 8%.

What does this all mean for you and your portfolio?

What we do know is that markets, in general, do not like uncertainty and how they perform in the short-run is out of our control.  While we have experienced some market resiliency, the probability of heightened volatility does exist.   Adhering to our discipline and remaining dedicated to our investment approach of continuously monitoring for opportunities and managing risk wherever possible, will remain our focus. We are confident that the news regarding tariffs and trade wars will eventually subside.  As that wanes over time, we stand ready for the next wave of news that will inevitably dominate our headlines that we will once again cycle through and take advantage of wherever possible.

No matter what the situation that presents itself, we will continue to work diligently behind the scenes on your behalf.  It is our hope that you stay focused on what truly matters and to not place an emotional “tariff” on your life’s ultimate goals and desires. That’s one of the things you do have control over.