“The United States has an $800 Billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!” - Donald Trump

 

So what’s really going on… The U.S. announced a 25% duty on a “yet-to-be-determined” list of Chinese imports that sent the Dow down 724 points yesterday. As tensions heat up, there has been some confusion in the media as to whether the U.S. government in placing tariffs on $50 - $60B worth of Chinese imports, or seeking $50B - $60B of tariff revenues, which would imply placing tariffs on $200B of Chinese imports. All this, coupled with China’s inevitable response has created uncertainty in the market.

 

In themselves, the tariffs outlined Thursday won’t have a big impact on the economy even if implemented in full, but that doesn’t necessarily dictate how the market will respond. The worry for investors has more to do with concerns about potential retaliation and escalation. China’s government criticized the punitive actions and said it would take “all necessary measures” in response. For companies that sell to China, or any country outside the U.S., the effects are likely to be negative—which is why markets are reacting. Even the best-case results would be worse economically than where we are now. However, that doesn’t mean we should panic. Beijing said today that it had plans to impose tariffs on just $3 billion worth of U.S. imports including fruit, pork and recycled aluminum. China had previously signaled it would prepare retaliatory tariffs against a range of agricultural products, taking aim at farm states that backed Trump in the 2016 presidential election.

 

What to watch going forward - Investors should pay attention to actions taken by the world’s largest economies, paying particular attention to tariffs that target nonagricultural. That means that in addition to the U.S. and China, investors should watch Japan, Mexico and Canada, as they’re key trading partners of the world’s largest economies. If policies are enacted by these large economies that specifically targeted trade in automobiles and auto parts, electronics, petroleum products, and electronics and machinery, it may be time to get concerned.

 

Until then, have a great weekend.

 

Tim