The investment climate has changed in the last few months. No longer is the world economy, inflation, interest rates and corporate profits front and center. The issue now is world trade. The current administration is attempting to use severe tariffs (a tax on imported goods) to force other countries to change their policies on world trade. The response so far is retaliatory. Other countries are imposing tariffs. Said plainly, when two parties both increase the cost of doing business, the result is less business. If the “trade war” escalates there is a high probability that the world economy slows dramatically. At days end, there are no winners in a trade war.
For decades, individual nations have protected the business entities in their country. This includes the U.S. Subsidies to farmers and the agriculture industry are just one example of U.S. protectionist policies. Major tax credits and incentives for the high-tech industry are another. In recent years, by mutual agreements with participating members, including the U.S., the world trade organization has granted advantages to certain countries. From time to time the need to make changes in the world system are negotiated. It appears this methodology is now to be abandoned in favor of instituting severe tariffs to force trading partners to “do as we say.” If the trade situation worsens it will be a major impediment to investments. We hope calmer approaches will prevail.
For perspective, we offer these observations.
- Running a $25 billion trade deficit with country X doesn’t mean the U.S. lost $25 billion. We received $25 billion of goods and services we wanted. It was a value for value trade. Country X gave us one type of asset and we gave Country X another.
- It is impossible for us to run a balanced trade account with poorer countries. The U.S. is 40 times as rich as Mexico. How can they possibly buy as much from us as we buy from them? A big part of this deficit is tourists traveling to Mexico. Are we to hurt U.S.-based airlines because Mexico’s citizens aren’t coming in equal numbers to tour New York, Chicago or Nashville?
- Where is the evidence of the problem? We have run trade deficits with the balance of the world for over 30 years. Yet the standard of living in the U.S. is the highest in history. Unemployment is historically low at 4%. The economy is growing nicely and even gaining momentum. Interest rates and inflation are low. The U.S. dollar is strong.
- We run trade surpluses with most countries in services such as banking, insurance, hi-tech consulting etc. Those surpluses are not reflected in typical trade deficit calculations
- The xenophobic rhetoric we now hear about China is a repeat of what was said in the late 1980’s and early 1990’s about Japan. What happened to the economic takeover of the U.S. by Japan because of our huge trade deficits?
- What IS a problem? Our ballooning BUDGET deficits! Countries that perhaps would buy more U.S. goods and services end up buying our Treasury bonds instead. We voluntarily give them an incentive to buy our bonds rather than our products.
If the trade war worsens, we will turn bearish on stocks and bullish on high quality fixed income. If the trade war is averted, our outlook is the opposite.