Protectionism and Tariffs
Gary Cohn’s resignation this week was likely related to the administration’s recent proposals to implement tariffs on steel and aluminum. According to media reports, Mr. Cohn was against this policy. He had tried to coordinate meetings with other executives outside of the aluminum and steel industry to lobby against tariff proposals and that meeting never occurred.
The economic argument being made by those against tariffs are that they cause significant economic challenges. A list of the arguments made by some economists against these policies include the following:
- Tariffs can lead to retaliatory action thereby impacting sales of US goods and services to countries outside of the United States;
- Tariffs on products imported may lead to price increases increasing the chance of higher inflation;
- Companies in the United States that rely on targeted items (in this case aluminum and steel) will likely pass on input commodities prices increases to consumers leading to potentially higher inflation;
- Increases in prices can impact economic growth.
There is already talk in Europe, Asia, Canada, and other countries that retaliation is likely. The specter of a trade war has impacted market psychology and likely will impact CEO and senior executive behavior. Concerns about protectionist policies can lead to inaction by senior executives relative to future business investment.
So why are tariffs even being considered in the first place? Technology and outsourcing of labor to lower cost production countries outside of the United States have devastated working-class jobs. I was in Buffalo, NY recently and the city is a shadow of what it once was. For example, in downtown one sees the shuttered stores and economic devastation. There is no disputing that employment trends have caused significant hardship for many working-class Americans. This hardship and the clamor for a return to the good old days is what makes tariff talk so appealing to a percentage of the American populace.
The reason why the markets have not reacted more strongly to tariff activity is that the tax cut package implemented in late December could offset in a significant way any negatives associated with higher prices. Higher GDP growth can be an economic positive and the tax cuts that have recently been implemented are designed to stimulate economic expansion. Tax cuts will provide some buffer against the outcomes associated with protectionist policies.
What is concerning, and something that we watch for, is if the expansion of protectionist policies trigger a global trade war. This could have significant effects on the US economy. Trade wars generally don’t work out well for anyone and this would include the United States. We believe the likelihood of a global trade war is probably small. There are many voices on both sides of the political spectrum against a full out trade war. Those voices likely will be a moderating influence on those focused on more protectionist tendencies. But we shall see.
Assessing headlines, including recently proposed tariffs, can impact our outlook on held and contemplated assets. It is important to assess these types of news headlines and the impact on securities earnings projections for companies that are tracked and held. Inflation also needs to be monitored as well.
It’s too early to say now what investment action might be necessitated by the proposed policies. It is fair to say, however, that significant protectionist policies from the United States government (and the resulting retaliatory action) could very well impact investment strategy going forward.
You can be assured we will be watching announcements carefully as well as assessing the potential fallout from any policy decisions. Our judgment and views will be reflected directly in portfolio strategies.
If you have any questions, please let me know!