Is it time to worry about a trade war?

Posted by Guest Blogger: Kristen Zavaski on Mar 7, 2018 8:00:00 AM
Guest Blogger: Kristen Zavaski
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On March 1, 2018, President Trump announced that the US plans to impose tariffs on steel and aluminum imports. Markets around the world were shocked by the news, with major US indices declining more than 1% just when it looked like they were recovering from the February downturn. Why did markets react so strongly? Is this a more serious threat going forward? In a word, yes.

First, let's define what's going on and why it matters.

A closer look at tariffs.

The good. Tariffs are a charge on imports—essentially, a tax. Say a ton of steel costs $100. The 25% tariff Trump proposed would require the seller to pay $25 to the US government. That would, in effect, mean the seller has to choose between selling the steel for $75, raising the price to $125 to net the same amount, or doing something in between. Practically, sellers will raise prices. This is the desired outcome, as it will allow producers here in the US to sell their products for higher prices. Therefore, these tariffs are good for the steel and aluminum industries.

The bad. The problem is that they are bad for anyone else that uses steel or aluminum, such as car manufacturers, builders, and the energy industry. Their input costs have just gone up substantially. According to a UBS analyst, Ford's costs just went up by $300 million, while GM's went up by $200 million. Other companies will be similarly impacted.

Companies like Ford and GM will have two choices here: 1) they can raise prices, which will start to push up inflation; or 2) they can eat the higher costs and make less money.

Either way, this is bad for the stock market, as it plays out across the economy. Both higher inflation and lower profits make stocks worth lesshence, the market reactions around the world.

Waiting for the world to react.

These are only the first-order effects, of course. The next shoe to drop will be how other countries respond. If we are lucky, they will take legal action through multilateral bodies such as the World Trade Organization, which will result in negotiations. If we are unlucky, they will start imposing retaliatory tariffs of their own, targeted to cause maximum pain to the US economy. We don't know what those will be, but we can be quite sure they will be designed to hit the US economy as hard as possible, to force us to remove the tariffs. This is how trade wars start, so it will be critical to watch those responses.

The next set of effects will be geopolitical. When you look at the actual sources of steel and aluminum imports, Canada tops the list. By angering and damaging our closest neighborat the same time as we are trying to renegotiate NAFTAthe possible damage just increases.

The net effect of the tariffs will be economic damage, higher inflation, and greater geopolitical uncertainty. On the corporate side, it will mean lower profits for the vast majority of companies. On the consumer side, it will mean higher prices for many goods, and likely, lost jobs in export industries.

Pay attention, but don't panic.

That said, there is a real possibility that this is either a trial balloon or a negotiating tactic. The US has tried to impose tariffs before, only to pull back as the costs became clear. Trump's announcement is not the same as actual action. This could all pass away, particularly as the rapid market response shows very clearly the potential costs. It is too early to be overly concerned, but we should definitely pay attention.

I hope this has answered some of the questions you may have about Trump's proposed tariffs. As a guest blogger, I'm unable to respond to comments posted below, but if you have any questions about how this could potentially impact you or your business, please feel free to contact me directly and I will be happy to help!

Kristen Zavaski is a guest blogger, representing Axial Financial Group in Burlington, MA. She offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. CRR, LLP (also represented as CRR, CRR CPA), Axial Financial Group, and Commonwealth Financial Network are separate and unrelated entities. Kristen can be reached at 781-273-1400 or kristen.zavaski@axialfg.com.  This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer. Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

Topics: Business Advisory