On March 1, President Trump claimed he would impose stiff steel and aluminum tariffs on imports. This news rattled the market. Trump abruptly proposed tariffs of 25% on steel and 10% on aluminum. He said the tariffs would be put in place the following week. These comments came after a Commerce Department investigation last month determined that imported metal was degrading the US industrial base. US metal manufacturers surged that day, but the rest of the market fell on the prospect of an escalating trade war. There are many facets to this topic that are worth diving into.
Market reaction: Fueled by unfounded inflation fears
The market is heavily driven by the Fed and its interest rate changes. The Fed is largely driven by inflation figures. When investors heard that tariffs might come into effect, it stoked inflationary fears. However, steel and aluminum tariffs would hit only about $40bn to $50bn worth of imports, out of total imports of $2.9 trillion last year – that’s just 1.6%. Commerce Secretary Wilbur Ross also came out with a statement on March 2nd that inflation from the tariffs would be minimal.
Political angle: Fighting for a NAFTA deal
Since then, there has been a lot of discussion on real motives and the likelihood that these tariffs will actually come to pass. While much of the rhetoric has been aimed at China and Russia, a lot of the subtext about this story revolves around the current NAFTA negotiations. As you can see from the graphic below, two of the top 3 steel exporters to the US are our current NAFTA partners: Canada and Mexico. Indeed, on March 6, Treasury Secretary Steven Mnuchin said Mexico and Canada could escape the tariffs if NAFTA gets done.
Source: New York Times
Politics: Tariffs are not great for political parties involved and do not have desired result
Historically, when elections were at stake, tariffs did not work well for the incumbents:
In 2002, George W Bush imposed steel tariffs with a similar thesis. The tariffs exacerbated several issues that they were trying to fix. The US ITC later found that they did not have a positive effect on the industry’s job count. In 2003, the tariffs were repealed after a WTO ruled that the tariffs were illegal.
Since the announcement, Trump has lost some of the support of his party. A cohesive party will be critical as the Republicans are working hard in primaries for upcoming 2018 mid-term elections.
So what now?
Over the last few days the White House has backtracked from some of its statements, offering potential for compromise. Additionally, big investors, like hedge fund billionaire Ray Dalio, have dismissed the rhetoric as just that: rhetoric. With tariffs looking less like a global trade war and more like NAFTA posturing, the market rallied on March 5.
Departure of Cohn
On March 6, Gary Cohn, Trump’s chief economic advisor and former Goldman Sachs COO, announced that he intended to resign. This is the latest in a string of departures from the Trump Administration. Neither Cohn nor the Whitehouse gave specific reasons for the resignation. However, Cohn was seen as a long-time believer in free markets and as a great advocate for Wall Street. Many believe he resigned specifically because of the tariff proposal. Markets opened lower on March 7.
We think the market will ultimately look beyond the rhetoric and jockeying in the near term. We will still see volatility around this topic until it officially plays out, but we remain positive on the market because:
- Earnings growth remains solid and have an upward bias due to tax reform
- A healthy, and accelerating, global macro backdrop
- Positive consumer sentiment
- Rates that are still low relative to historical norms
- A weak dollar
As always, if you have any questions, we are here for you!