Tariff Turmoil

Your recent quarter end statement does not reflect the recent turmoil of the markets post quarter.  We already had a market discussion written, but threw it away given the recent and ever-changing events that are happening in the White House and thereby in the economy and the markets.  As of writing this on Monday April 7th, the S&P 500 is down 17% from its peak on February 19th and is down 14% year-to-date.  While it has been volatile, the stock market was actually slightly positive on the year until President Trump’s self-proclaimed ‘Liberation Day’ on Tuesday, April 2nd.  While Westview seeks to avoid political commentary, many of the current dynamics driving the market have a significant interconnectivity with politics. In this edition, we will attempt to provide some background and insight into this tariff battle.

Trade Deficits

First, we need to understand that the reciprocal tariffs are based not on tariff rates that other countries impose, but rather on the trade deficit we have with other nations. Yes, some countries clearly abuse the system and there should be targeted plans for dealing with these few countries.  Countries that practice unfair trading policies should be the focus but not trade deficits.  In general, trade deficits are not a bad thing.  The U.S. has been running trade deficits every year for nearly half a century, during which the economy grew substantially, and with it, the quality of life for every American.   

Comparative advantage is the cornerstone of free trade.  It started with the first civilizations when one village/tribe/group could make something better than the other and vice versa, thus setting up trade – one good for the other good.  This is known in economics as competitive advantage and is practiced to the nth degree in the current world economy.  Our imports are generally inexpensive, low-tech goods while our exports are more sophisticated technologies and equipment.  We don’t make our own furniture and T-shirts because our demographically shrinking labor force has better opportunities.  Even if we had the workforce available to make our own t-shirts, that is not a productive use of our human resources when we could be making and creating higher paying sophisticated goods.  There are many other factors to consider in understanding our trade deficit with other nations, such as:

• We are a wealthier country than most and tend to consume more goods than other nations.

• The U.S. dollar has the substantial advantage of being the worlds reserve currency.  Our chief exports are U.S. dollars, which the rest of the world uses for central bank reserves, buying our goods and services, investing in our stock and bond markets and trade settlements.  It is effectively impossible for the United States to retain its status as world reserve currency while running a trade surplus.

• U.S. exports continue to grow at a fast pace.  U.S. exports have increased four times over the last 35 years.  Just not as fast as our imports, creating a deficit.  

• We run a massive trade SURPLUS with the world when it comes to SERVICES, part of our competitive advantage.  

• A trade balance between two countries is a byproduct of a history of decisions by a million investors and companies.  Attempts to centrally plan or micro-manage such from elites in positions of power goes against free market thinking and has historically not ended well.  

Tariffs

Stepping away from trade deficits, as far as actual tariffs in place now, before the recently enacted tariffs of the last couple months, the U.S. already had higher average tariffs than most other major trading partners.  Before recent increases, the actual U.S. tariff rate on foreign goods was 2.7%.  Canada’s tariff rate on foreign goods is 1.8%.  Japan’s is 2% and the European Unions is 2%.   Now, we are talking about an average 17% U.S. tariff rate on foreign goods.

About 45% of U.S. imports are inputs that go into our own manufacturing production.  An import tax on these inputs makes U.S. exporters less competitive.  That will reduce exports, not increase them.  

Companies will be forced to pass on most or all of these tariff costs to customers while potentially reducing their earnings.  Tariffs are effectively a tax increase on the American people and businesses just like a sales tax increase.  

What’s Next?

Is this another Trump negotiation tactic? How will nations react and enter negotiations? Will businesses move manufacturing back to the US (which takes years) or will they wait and see? These are all questions that will be watched closely and we expect we should have some answers sooner rather than later.  Possibly by the time this even hits your inbox.  

The good news is that the recently proposed reciprocal tariffs are probably much worse than what we will end up with.  We expect over the next several days, weeks, months that we will see some level of negotiations between our trading partners, with various multi-lateral reductions in tariffs, exceptions, pauses, special circumstances and other various justifications for these tariffs to be lowered.  No one knows what that will look like, or when that will start and over how long, but the overall trend will be a positive move from the current proposed tariffs and each positive piece of news will help the market recover.   

American businesses will do what they always do and adapt.  We can expect a slowing of growth in the near future but fortunately, the economy is in great shape as of today and can absorb much of this, assuming the tariff numbers put out last week are not final.  The job market is still strong with 228,000 new jobs added in March compared to an estimated 130,000 and unemployment is at 4.2%.   

As always, during times of market volatility it is important to stay the course and remain invested. Even though this bout of volatility may feel different (remember the global pandemic in 2020), it likely is not. Evidence repeatedly shows trying to time the market by making drastic exits and entries often underperforms remaining invested.  Time in the market has always done better than timing the market.  We welcome any questions or concerns you may have on your portfolio and financial plan. As always, we appreciate your continued trust in our services.