Investment27 March 2018

Trump's trade war

Steven Kassar
Steven Kassar
Investment Analyst

Trump’s 2016 election victory came from swinging states reversing their 2012 support for the Democrats. These states were the backbone of the steel and manufacturing industries through much of the 1900s. Trump’s recent announcement of tariffs of 25% on imported steel and 10% on imported aluminium are intended to protect local industries from cheaper imports, with the expectation this will lead to more jobs. The situation is more complex than this though – through price flow on to other industries, inflation and potential retaliation. In this article we explore how it might impact your investment returns.

These new tariffs are seen as targeting China, but Canada and Mexico actually supply the most steel to the US, and they’ve been exempted from the tariffs already. It almost appears symbolic.

As anticipated, the Chinese government has seen the move as anti-Chinese and has vowed to retaliate. Two ways they could do that are to impose tariffs on various imports from the US, or change who they do business with. For example, they could stop Chinese airlines buying Boeing planes. The last Chinese order for Boeing planes amounted to $22 billion, with China expected to order up to $1.1 trillion worth of planes between now and 2036. It would be a significant blow to the US if China instead sourced their aircraft from Airbus in Europe.

Retaliation isn’t the only negative result from tariffs. Detroit, one of the largest car manufacturing regions, relies on steel imports for the construction of cars. Under tariffs, the price of steel will rise which will flow into the costs of manufactured goods, including cars. This could lead to higher prices and lower demand for American goods which is an unintended outcome. In this inflationary scenario, the US Federal Reserve may choose to raise interest rates faster than expected. This would negatively impact the price of bonds and stocks.

Is this a trade war?

While this tariff in isolation will have little impact, there’s a risk of tit-for-tat responses across a number of products. The European Union has talked about applying tariffs on US imports like Harley Davidson motorbikes, jeans and clothes, and even bourbon. It’s possible Trump will threaten Europe with further tariffs, and things could spiral from there.

Past protectionism is considered to have deepened America’s great depression, and the last time America applied tariffs to steel in 2002, 13,000 steel jobs were lost. It’s not clear this time around that the outcome will be any different. Trump may be leading the American economy into the next recession, definitely a negative for his next presidential campaign. 

So, what’s next?

Other countries may take the issue to the World Trade Organisation and have the tariffs ruled invalid, but this isn’t assured to work given the way Trump has enacted the tariffs. Alternatively, China may realise that in a trade war they stand to lose a lot. China is a large exporter and the smartest move may be to let this go without a meaningful response. By retaliating in a small way, both China and Trump can be seen to be doing something about the other, with minimal impact on global trade.

Australia is a large exporter of resources, so this is an important issue for us. The current tariffs are on manufactured goods, so this shouldn’t impact Australia directly. We believe there’s a small chance the current tariffs will lead to major retaliation. There will be specific companies that suffer, but there should be minimal impact on returns more broadly. 

This article contains information or advice that is intended to be general in nature and which was prepared without taking into account your personal objectives, financial situation or needs. Because of that, before acting on any information or advice in this article, please consider whether it is appropriate to your personal circumstances, talk to a financial planner and consider the relevant Member guide, available at tasplan.com.au or by calling 1800 005 166, before making a decision about whether to acquire the products.

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