Trade War Intensifies

In our last quarterly update, we discussed the implementation of tariffs and barriers to trade involving the U.S. and its trade partners including China, the EU, Canada and Mexico. Since then, the brewing trade war has only intensified, and the economy is beginning to feel the effects.

Since the initial tariff announcements, the Fed has found and noted (in the Beige Book) that manufacturers have seen an increase in industrial input prices, including steel and aluminum. A number of U.S. companies has expressed that tariffs and trade barriers pose a direct risk to their operations and industry. According to the Wall Street Journal, some businesses already have plans in place to pass tariffs onto customers by raising the prices of goods they sell. Additionally, corporate earnings in certain sectors are beginning to suffer. For example, Whirlpool’s stock had its worst day in over 30 years (down almost 15%) on July 24, citing the increased cost of steel.

American farmers are also beginning to feel the burden of tariffs. On July 24, the Trump administration announced plans to offer $12 billion in aid to farmers whose revenues and profits have been severely negatively affected by the loss of certain traditional export markets. Soybean farmers, in particular, have faced plummeting demand from China after China introduced a retaliatory tariff on soybean imports from the US. Pork farmers have begun to feel pressure as well, as exports from the U.S. declined by 18% in the first half of 2018 largely due to tariffs imposed by pork importers, including China.

The job market, while still strong, is beginning to show cracks. In March, as the tariffs were just beginning to be discussed, the President stated that putting tariffs in place will help protect manufacturing jobs. According to a Wall Street Journal article from May 22, 2018, however, non-farm payrolls in the top 10 steel-producing communities in the U.S. grew at a pace that was slower than the broader national rate. In fact, four of the communities saw non-farm payrolls shrink following the announcement and implementation of tariffs.

President Trump has repeatedly maintained that the implementation of tariffs is a temporary tactic to put pressure on the U.S.’s trade partners in order to negotiate better trade deals. That may indeed be the case, as shown by the potential deal struck with the EU on July 25, but the short-term effects of a reduction in corporate earnings in certain market segments cannot be ignored.This is yet another reason to maintain a cautious posture with respect to global equities. Should the trade war intensify further or if it becomes clear that the promise of better trade deals will not materialize, we will recommend a further reduction in equity positions.