On March 1, 2018, President Trump announced via Twitter that “trade wars are good, and easy to win.” Soon thereafter, the White House floated the idea of a 25% tariff on all imported steel and 10% on all imported aluminum to disadvantage imports and support the domestic industry. The rationale had three main components, all of which align closely with President Trump’s campaign platform:
- Creating leverage for the US in renegotiating NAFTA;
- Protecting national security; and
- Protecting US metal production jobs.
Economists, government officials and corporate leaders generally disagreed with the President’s position and proposal with little hesitation. Their basis was that tariffs would likely be met with retaliation from other nations, which would add more barriers to global free trade (a net negative on the local and global economy). This would likely cause ripple effects throughout the economy, including rising input prices for a variety of goods eventually affecting individual consumers by way of higher prices (i.e., inflation).
President Trump’s announcement induced substantial backlash across the globe. Domestically, many US companies, industry associations and trade associations opined that tariffs would negatively affect business. Even some congressional Republicans, usually free market/business friendly advocates, urged Trump to reconsider. The announcement was also at odds with views expressed by the Federal Reserve Chair Jerome Powell, who testified to Congress that free trade is a net positive to the economy. Even Gary Cohn, Trump’s top economic advisor, announced his resignation on March 6, allegedly due to his disagreement with the policy. Internationally, the EU, Canada, Mexico and China all quickly responded to the rumors with announcements that they were actively evaluating retaliatory tariffs on US goods.
President Trump ultimately signed a 25% tariff on imported steel and 10% tariff on imported aluminum on March 8, keeping a campaign promise to be more aggressive on trade policy. These tariffs took effect on March 23, 2018. He did walk back the initial announcement somewhat, as Canada and Mexico were exempted. Trump explained that the tariffs were an early step in renegotiating many of the US’s trade deals, including NAFTA. Then, on March 22, 2018, President Trump signed an executive memo placing tariffs on goods from China in aggregate of $50B on over 1,300 products. This was done as part of a string of actions against China on the basis that China is stealing American intellectual property. China retaliated by matching the US dollar for dollar by placing $50B in tariffs on 128 products. An end to this dispute, which has already affected hundreds of companies and will likely affect more, does not appear imminent.
While it is difficult to predict the potential effects of what appears to be, at the least, increased protectionist policy and, at most, a global trade war, the momentum towards global free trade over the past several decades is subsiding and potentially reversing.Many prominent market strategists believe that this may have negative consequences for the coordinated global growth that the world has recently experienced. Ray Dalio, founder and co-chairman of Bridgewater Associates, recently noted that, due to China’s extensive holdings in US government bonds, a trade war could become an “uglier” capital war. Additionally, Jeffrey Gundlach, founder and CEO of DoubleLine, reminded investors in a recent interview that tariffs were one of the primary causes of the Great Depression. While Delegate does not believe that a depression is in the cards, we are advising our clients to be underweight versus policy targets in most public risk assets, as we believe the downside potential is currently greater than the upside.