Mar 13, 2018

US Trade Wars: Good or Bad?

The financial markets are thrown into turmoil once again, by the implementation of steel tariffs by the Trump administration as a barrier to the cheap China steel. However, instead of targeting just China, the steel tariffs are imposed on a global scale whether they are friends or enemies. The problem is that, US imports 70% of its steel from Canada and Mexico while China only constitutes 2% of its steel imports. After much protests from Canada and Mexico, the Trump administration excluded both countries and went on to impose the tariffs to include every other countries. What are the implications of this action to our investment portfolio? Let me address some of the frequently asked questions:

Are Trade Wars Good for USA?

The last time USA imposed extensive trade protection was during the Great Depression in the 1930s,  as the US government tried to protect the US jobs via tariffs due to high unemployment. Research from economists during later years concluded that the trade protection during the Great Depression period helped to prolong the down turn and extended the economic slump around the world. 

During 2009, The Obama administration slapped 35% tariffs on China made tires. Base on a study done, around 1200 jobs are saved and the US tire industry managed to turn their fate around. However, more than 3000 other jobs are lost as a result and $2 billion dollars worth of lost revenue in tires related industries. Adding to the injury was the the Chinese retaliation of tariffs on exports of chicken parts by US.

Most economists agree that trade protection leads to a lose-lose situation for all parties.

If Tariffs are Bad, Why do Trump still impose Tariffs?

President Trump has promised to protect the jobs of US steel workers in one of his election pledges and he is making true on his election pledge. This will improve his reputation among his core voters even though at an expense of the economy in general.

If Trump wants to punish the Chinese, why is he imposing Tariffs across the board?

Donald Trump is an unconventional President and he believes that by being unpredictable, he will be able to attain better results. By imposing tariffs across the board, he may be able to seek trade concession from other countries trying using the steel tariff as an excuse.

How will it affect the financial markets and my investment portfolio?

There will not be any major impact to the financial markets unless the situation develops into a full blown trade wars between major regions. Singapore, which is very dependent on free trade due to its small population, will be badly affected if the trade barriers expands to key export Singaporean products such as computer chips and petroleum products. Trade barriers will essentially lead to higher inflation and its associated higher interest rates, which will slow down economies. As long as the Trump administration is using tariffs as an excuse to negotiate better trade deals, such as forcing more international companies to relocate their operations to US, this situation should not persist as Trump increases the number of excluded countries to his tariffs coverage and eventually scrape the tariffs after his objectives are met. However, if negotiation breaks down and a trade war ensues, we will be ensure of nasty downwards reaction in the stock markets, especially for the more export dependent emerging markets.

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