Last week, global stock markets took a bit of a dip after President Trump announced a 25 percent tariff on steel and a 10 percent tariff on aluminum. Tariffs are taxes on goods imported from other countries. In general, governments impose tariffs to enhance revenue and/or protect domestic industries from competition abroad.
Tariffs tend to spark fierce debate about protectionism and free trade. Proponents suggest tariffs may protect domestic companies and create jobs. Critics suggest tariffs may slow economic growth and drive prices higher.
Please note that tariffs don’t always produce the anticipated results. Let’s take a look at two examples while keeping in mind that World Trade Organization (WTO) rules do not allow countries to impose new tariffs unless they are ‘safeguards’ intended to protect a domestic industry.
In 2002, President George W. Bush imposed a tariff on steel. While the WTO was deliberating about the action, “…the European Union ended up hitting Bush where it hurt. The bloc planned tariffs on a wide range of products, including many produced in key swing states where job losses could hurt Bush’s chances of re-election,” reported Time. The WTO eventually decided the tariff was illegal. Eventually, in 2003, the tariff was removed.
In 2009, President Obama imposed a safeguard tariff on Chinese-made tires. China retaliated by restricting imports of American chicken feet (a culinary treat in China), reported The Economist. At the time, U.S. exports of chicken appendages were valued at about $278 million. Guess what happened?
Far fewer Chinese tires were exported to the United States. However, tire imports from South Korea, Thailand, and Indonesia doubled, more than offsetting the decline in Chinese-made tires, reported the Council on Foreign Affairs. On the other side of the tariff tiff, U.S. poultry exports to China fell, but U.S. poultry exports to Hong Kong rose. As they say, when one door closes, another door opens.
In the big picture, it’s unlikely U.S. tariffs on steel and aluminum will have significant impact on China, the reported target of the new steel tariffs. After all, China ranks eleventh on the list of nations sending steel to the United States, reported National Review. Most U.S. steel is imported from U.S. allies such as Canada, Mexico, and South Korea.
Key points for the week
Stocks dipped on concerns that U.S. tariffs on aluminum and steel will undermine trade.
Global stocks are geared to relatively low trade barriers.
Successful investing requires separating policy views from investment outlooks.
The equity markets also reacted negatively to comments by Federal Reserve Chair Jerome Powell.
Although the Trump administration’s decision on tariffs was the more interesting, investors became concerned the relatively free movement of goods and services between developed countries is at risk of reversing. The market reacted negatively, despite the narrow impact of the announcement, for a number of reasons:
Global companies are organized to take advantage of the relatively free flow of goods and services. The tariffs are a step away from current policy and place sales and production strategies at risk if trade policy continues to tighten.
Investors were anticipating key allies, including Canada, to be excluded from the tariffs. When they were not, it raised concerns that NAFTA and other trade deals, which impact a broad array of companies and industries, could be undermined.
The broader range of companies included in the tariffs also raised the risk of reprisals, which could escalate into a trade war, among industries central to U.S. exports.
Future trade negotiations will involve a fair amount of public posturing as each side hopes to strike the best deal. While economic fundamentals remain strong, this rhetoric is one more reason to expect a bumpy 2018.
Successful investing in our politically polarized world requires investors to separate their policy views from their investment outlooks. An investor may passionately believe the United States’ basic industries are faced with unfair competition from overseas competitors. He or she may be right, but the market may still react poorly to tariffs or trade tightening.
Recent elections have reminded us of two important truths:
It is difficult to predict market reactions to political news.
Politics aren’t nearly as important as fundamentals in determining the long-term direction of the market.
Whether you hold strong views on the current tariff controversy, the recently passed tax law, or all things Trump, make sure your investment outlook isn’t being driven by something far more important to boosting media ratings than determining the long-term outlook for corporate profits. Long term stock prices are determined by corporate earnings.
What are we reading?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
IRS Issues Updated Inflation Adjustments for 2018.
the IRS announced the new lower tax brackets for 2018 and a number of other new items affected by the Tax Cuts and Jobs Act. It also issued inflation-adjusted amounts for many provisions that were unchanged by the Act, other than that the inflation adjustments now must be calculated using the chained consumer price index method, updating the numbers that were previously announced.
Don’t Waste a Big Benefit from the Tax Cuts and Jobs Act.
Individuals may have noticed an increase in their net pay during the month of February. The increase, exclusive of any salary increases/bonuses/etc., is due to the federal income tax withholding based on the new tax law. Bankrate.com notes that only 24% of workers have noticed this change in their net pay. As financial planners, we look at the additional income as a way to reduce debt, increase savings towards retirement and save for other major goals. It is important to take advantage of this net pay boost and avoid the trap of lifestyle inflation with this increased cash flow.
IRS Warns Taxpayers of New Refund Scam.
The IRS has alerted taxpayers of a new scam in which criminals deposit fraudulent tax refunds into an individual's bank account and then attempt to reclaim the funds. They accomplish this by (1) Stealing taxpayer data; (2) using the stolen information to file fraudulent tax returns; (3) having the refunds deposited into the taxpayers' bank accounts; and (4) telling the victims the money was mistakenly deposited into their accounts and asking them to return it. Criminals may pose as debt collection agency officials acting on behalf of the IRS, or the taxpayer may receive an automated call purportedly from the IRS. The IRS encourages victims of this scam to follow the procedures outlined in Tax Topic Number 161— Returning an Erroneous Refund. Also, taxpayers should immediately discuss the issue with their financial advisor and tax preparers. IRS Tax Tip 2018-32.
What Does Your State Export?
Every state has adopted official symbols that represent its culture and heritage. You can probably name your state’s official bird and flower. It’s likely you recognize your state’s flag and its seal. Can you name its highest value export?
The United States exported about $1.6 trillion worth of goods during 2017, according to The World Factbook. Here is a list of the states that export the most, along with their highest value exports:
Texas – fuel oil and light oil
California – civilian aircraft, engines, and parts
Washington – civilian aircraft, tanks, and armored vehicles
New York – diamonds and art
Illinois – light oil and soybeans
Michigan – trucks and passenger vehicles
Louisiana – fuel oil and soybeans
Florida – civilian aircraft and cellular phones
Ohio – civilian aircraft and soybeans
Pennsylvania – coal and medicine
Indiana – medicine and gear boxes
Georgia – civilian aircraft and gas turbines
New Jersey – fuel oil and jewelry
Tennessee – medical instruments and civilian aircraft
North Carolina – civilian aircraft and medicine
It’s interesting to note top-exporting states often are top-importing states. The top 10 states by import are: California, Texas, Michigan, Illinois, New York, New Jersey, Georgia, Pennsylvania, Tennessee, and Florida.
Story of the week
Man riding horse on freeway arrested for DUI
One way to avoid getting a DUI after a night of drinking is simply not to drive. One resident in California took “driving” under the influence a little too literally and decided to “ride” under the influence instead. The man was pulled over by the California Highway Patrol as he was riding his horse along the freeway. While no animal or person was injured in the incident, police released a statement saying “they do not ‘horse’ around with DUI.”
Weekly Focus – Think About It
"Consciously or unconsciously, every one of us does render some service or other. If we cultivate the habit of doing this service deliberately, our desire for service will steadily grow stronger, and will make, not only our own happiness, but that of the world at large."
~ Mahatma Gandhi, 1869-1948, Indian Political and Spiritual Leader
"Vision without action is a daydream. Action without vision is a nightmare."
"The beginning is the most important part of the work."
~ Plato, Philosopher
"Take time to deliberate; but when the time for action arrives, stop thinking and go in."
~ Andrew Jackson, 7th US President
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and are subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal.
Links are being provided for information purposes only. RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.
RJ Approval # C18-011622