Trump’s Tough Talk On Tariffs Threatens Global Trade. Here’s what investors should do.
In an effort to reduce the US trade deficit, which by some estimates is as much as US$504 billion annually, President Trump has initiated steps to impose tariffs of 25% on steel imports and 10% on imported aluminium.
This announcement was made at the beginning of March. Barely three weeks later, Trump instructed the office of the US trade representative, the government agency responsible for the country’s trade policy, to impose tariffs on approximately US$50 billion of Chinese imports.
The second round of tariffs was prompted by a seven-month long US government investigation that found that China had stolen or forced US companies to surrender their intellectual property. According to a CNN report, Chinese agencies had hacked into US computer networks to access sensitive data.
US government officials clarified that the tariffs would not compensate for the intellectual property theft, which they said ran into hundreds of billions of dollars.
Why has the United States government suddenly woken up to this issue? What prompted these accusations and the country’s belligerent stance?
At the time that Trump imposed the new round of tariffs, he said, “It’s probably one of the reasons I was elected. Probably the main reason.”
Threat of tariff war hammers stock valuations
China hasn’t taken these hostile announcements lying down. It has announced its own set of retaliatory tariffs. California wines, fruits, and almonds could attract import duties. Other American products including pork and aluminium could be next. The Chinese authorities have issued a list of 128 US products that it is planning to target.
Reacting to the announcements made by the US, China’s Commerce Ministry said, “We are confident in our capability to face up to any challenge. We urge the US to cease and desist.”
A trade war seems inevitable between the world’s two largest economies.
What has been the effect on global stock markets? The Dow Jones Industrial Average, an index of 30 large publicly owned companies in the US, has lost over 1,000 points between 1 March 2018 and 23 March.
|Date||Dow Jones Industrial Average|
|1 March 2018||24,609|
|23 March 2018||23,533|
|Fall (number of points)||1,076|
Asian markets have been hit as well. In the last month, Japan’s Nikkei 225 lost about 6%. On March 23 alone, the day after Trump announced the second round of tariffs, the Nikkei fell by 4.5%.
The Shanghai Composite Index and the Shenzhen Composite Index have also registered sharp declines. Hong Kong’s Hang Seng Index also fell as Tencent, Asia’s biggest company by market value, saw a steep reduction in its share price.
The Straits Times Index lost 2% on 23 March, falling by 70 points. A global trade war is likely to have an adverse effect on Singapore’s companies, a large number of which have extensive international operations.
What should investors do?
With the world’s stock markets trending downwards, investors could see large declines in the values of their portfolios. What is the best way to protect yourself if there is a full-fledged trade war?
Gold is a perennial favourite in times of uncertainty. You should allocate between 5% and 10% of your portfolio to the precious metal. This could help you to cut down the losses that you incur in the equity markets. In fact, gold spiked by 1.6% on 23 March.
Even though global equity indices are falling, it doesn’t mean that there aren’t any opportunities in the stock market.
Peter Oppenheimer, chief global equity strategist at Goldman Sachs, one of the world’s leading financial services firms, says, “Below the surface of the market, trade conflict would benefit the performance of the most domestic-facing US stocks relative to most foreign-facing firms.”
Here is a list of firms that Oppenheimer recommended in January 2017. All these companies derive the vast majority of their income from domestic US operations. Goldman Sachs’ recommendation for these stocks is based on the premise that a trade war will not have a direct effect on the business that these firms conduct.
Goldman’s domestic sales basket ideas
However, investors should conduct their own research before making a purchase decision based on Goldman’s recommendations. It’s important to take a number of factors into consideration other than the fact that these firms operate almost exclusively in the domestic market.
Each of the companies listed above registered a decline in their share price on 23 March. Of course, their stock valuations could do better over an extended period.
No winners in a trade war
The recently conducted quarterly CNBC Global CFO Council poll found that US trade policy has become a major area of concern for the country’s business leaders. Over a quarter of respondents say that it is currently the biggest threat that American businesses face.
The previous poll, which was conducted in the fourth quarter of 2017, had only 11.6% of respondents saying that trade policies were their primary concern. Now trade outranks every other issue including the threat of cyberattack and even the prospect of a decline in consumer demand.
Will the tariffs imposed by the US fulfil the stated objective of reducing America’s trade deficit? That’s hard to say, but the anti-trade measures initiated by President Trump could have unintended consequences.
Almost 66% of the respondents to the CNBC Global CFO Council poll say that the tariffs will have a negative effect on their companies. According to one respondent, “The direct impact from steel/aluminium tariffs would be negligible. The indirect impact from retaliation could be significant.”
The new tariffs imposed by Trump may be justified in many ways. After all, Facebook still can’t operate in China. Tesla has to pay an import duty of 25% for selling its electric cars in China. In sharp contrast to this, Chinese cars can be imported into the US by paying only 2.5%.
But China may decide to take the trade war to the next level. If it does, the consequences for US exporters could be grave. Annual American exports to China stand at US$130 billion. If retaliatory tariffs are imposed on these, US producers could become the unintended victims of the new tariffs imposed by Trump.