Well folks, it looks like we may have a good old fashioned trade war on our hands. And the markets are reacting accordingly.
Earlier this month, the Trump administrated announced an executive order that placed tariffs on aluminum and steel. The exact details have yet to be hammered out, but what we do know is that the tariffs will be 10% and 25%, respectively.
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Here's what StreetAuthority's Nathan Slaughter had to say about the situation:
As the world's largest steel importer, the U.S. sanctions will be directed at many suppliers, particularly South Korea, China, Brazil and Japan. This bold chess gambit could help struggling homegrown steel manufacturers, whose business fortunes have faded amid a flood of cheap imports. However, it also invites the possibility of retaliation with products that we ship abroad, such as soybeans and liquified natural gas.
The industries involved could certainly use some friendly intervention. With capacity utilization of 40%, the nation's aluminum facilities aren't even running at half-speed. Steel utilization is a little better at 78%, although the workforce is only a fourth of what it used to be.
Nathan also pointed out, however, that we've tried this before. And often times, protectionist measures like this end up leading to more jobs lost than created. That could happen again. (You can read Nathan's full commentary here.)
He also points out, that there are companies in the U.S. that purchase semi-finished steel from overseas and then turn it into products that are critical to the manufacturing and heavy equipment industries. These companies will likely see rising costs, along with the likes of companies such as General Motors (NYSE: GM), Boeing (NYSE: BA), and Caterpillar (NYSE: CAT).
At first, the levies understandably caused a bit of a scare in the markets. Then, as more information came out that Mexico, Canada, and some EU member countries may be exempt, there was a collective sigh of relief.
Last week, however, the White House announced a series of measures directed squarely at China in the form of tariffs on about $50 billion of Chinese imports, as well as restrictions on technology transfers, according to the Wall Street Journal.
The market tanked last Thursday in response. The S&P 500 lost 2.5%. The Dow Jones Industrial Average, meanwhile, shed 724 points, a loss of nearly 3%.
From The Wall Street Journal:
The $50 billion figure equals about 10% of U.S. imports from China. U.S. officials said the amount is roughly equal to its calculations of annual lost earnings by U.S. companies in China as a result of forced joint ventures and technology transfers.
Unlike the previous tariffs, which were opposed by most free traders on both sides of the aisle, this latest move does seem to have some political support.
Why? Well, unlike the previous move, which was done through an obscure law allowing the President to unilaterally declare tariffs for "national security" concerns and was initially announced as a broad move against adversaries and allies alike, this one is directly aimed at China. And China has been a bad actor on the global economic stage for decades.
It's no secret that China heavily subsidizes its many sectors of its economy -- and I'm not just talking about the aluminum and steel industries. What's less widely known, however, are some of the egregious business practices that are actively encouraged by the Chinese government, particularly with regard to intellectual property and foreign investment.
Here's a simple example of what I'm talking about...
Say you want to build a factory for a new tech gadget in China. After all, you need exposure to this developing market, and your company can't afford to do make it in many other places. The government will welcome you with open arms, with just one little catch. You'll need to partner with a Chinese company in order to make it happen. And once you're up and running, your "partner" screws you by passing along your intellectual property secrets to the Chinese government.
Honestly, where's the fairness in that?
Along with these moves, the administration says it will bring new cases before the World Trade Organization in hopes of resolving their grievances. And as soon as they are, the restrictions will be lifted. That's the best-case scenario.
We'll see. While it's true that the Chinese have more to lose economically than America does -- and it's true that something needs to be done about China's nefarious dealings -- try telling that to the American consumer.
As Nathan pointed out in his commentary, it's the American consumer that will also feel the pinch from this, as higher costs are passed along. It's basic economics. And don't forget about investors, either. Market participants will need to sort out just exactly what the ramifications will be moving forward. For now, the uncertainty is causing panic.
My advice: Be sure and check your portfolio's exposure to some of the industries affected, including some of the names mentioned above. But I wouldn't start a fire sale in my portfolio over this just yet, if I were you. Stay frosty.
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