Trade Imbalances Won’t Warrant Climbing a Wall of WorrySheaff Briefs Editor
Everybody appears to be talking about trade wars, says CNBC’s Elizabeth Schultz. But trade wars are nothing new, she reminds viewers as she interviews International Monetary Fund historian and Princeton professor Harold James. After a period beginning with the Smoot Hawley Act in 1930, continuing through the “chicken wars” in the 1960s and trade disputes with Japan in the 1980s, there ensued several trade war-free decades. Now, with President Trump’s announcements of tariffs and a 25% levy on imports from China (eliciting a retaliatory list of Chinese tariffs on U.S. farm products, autos, and energy), should the balance of trade be the newest brick in investors’ Wall of Worry?
Trade today is many times more robust than in times past due to technology and innovations in transportation and logistics, notes Sheaff Brock Managing Director Dave Gilreath. And with richer countries buying more stuff than their poorer counterparts can, he points out, world trade will never actually be precisely “balanced.” (As just one example of balance of trade anomalies, in the U.S., we manufacture more steel than ever before in our history, he observes, but China can still produce steel more economically due to lower labor costs.) With countries today so much less insulated and so much more interdependent for goods and services, trade will continue—and continue to adjust its flows and find new “balance of trade” points on the actual “imbalance of trade” continuum.
The Trump Administration is signaling an end to the “kid gloves” treatment of China, Brian Wesbury of First Trust comments, noting that China has used various methods to steal hundreds of billions worth of trade secrets and intellectual property via espionage, counterfeiting, forced disclosures for market entry, and reverse-engineering of products. “One gets the sense the Administration is thinking that, at some point, China can’t retaliate because it’ll run out of items to tariff well before the US does. That’s the downside of China’s massive trade surplus…. Unfortunately, other strategies haven’t worked, and now the kid gloves are off. Let’s give it a little while and see if it works,” First Trust advises.
“Not all trade disputes end badly,” Professor James explained in the CNBC interview. Trade wars are disruptive, he admits, but trade “spats” help markets find the right balance. Every year since WWII, U.S. trade with Japan, for example, continued to grow, and tariffs gave the U.S. leverage to negotiate trade differences with Japan.
Will any tariff expense “drag” on the economy be significant? Indeed, says Strategas Research, as much as $120 billion. But, Strategas opines, tax policy is going to prove an $800 billion benefit to the economy, as shown in the chart below.
Meanwhile, Gilreath observes, small and mid-cap stocks are much less affected by global trade issues because their exports are a much smaller part of their revenue than the big multi-national companies. Investors concerned about trade wars might want to shift allocations to accommodate that reality.
In the final analysis, Gilreath concludes, trade imbalances won’t warrant a panicky climb onto the Wall of Worry.