In the weeks after the presidential election, some market analysts spoke sotto voce about the potential negative impacts of new tariffs Donald Trump promised during his campaign.
Now, these concerns are quite audible.
Yet, amid growing but by no means market-altering uncertainty about the latter pledge, The Washington Post ran a story Jan. 6 indicating that new tariffs might be much narrower than Trump promised on the stump. The story indicated they would probably be limited to a few key areas: the defense industrial supply chain, critical medical supplies and energy production.
Trump denied the report, characteristically calling it “fake news.” But the market didn’t buy this, taking his reaction as supporting the widespread belief that Trump’s tough tariff talk is largely a negotiating position.
Though some of Trump’s tariff intentions will probably be realized, his reliably unpredictable nature naturally raises doubts about how far this will go. But even if he follows through full force, concerns about economic and market impacts may be greatly overblown. Further, the January market pullback may be in part due to tariff uncertainty. So to some extent, negative impacts may be baked in.
Focus on China
Despite Trump’s frequent opining about Mexico and Canada (recently actually suggesting that Canada become a state), his main focus is still what it has always been: China. China was the main target of tariffs in Trump’s first term (many of which remain in force today). Impacts were minimal on other targeted nations, including Canada, Japan, Mexico, France, South Korea, Germany, Taiwan and India, and on Vietnam, where U.S. tariffs actually decreased under Trump.
Of course, the ultimate extent of new tariffs on China this year is as difficult to predict as the mercurial incoming president. Goldman Sachs has projected a 20% increase.
Even if GS is spot on, there are some good reasons not to expect substantial economic or market impacts from new tariffs on China.
These include:
- Declining Chinese exports to the U.S. Absent from the public tariff debate is the fact that American imports from China as a percentage of total imports are at a two-decade low — only 13.3% as of late last year, according to data from the Treasury Department and the Federal Reserve. This percentage rose steadily from 10.5% in 2002 to a high of 21.2% in 2016-2018. After that, Chinese exports to the U.S. started declining. At the same time, with exports to Europe flat in recent years, China’s exports to other BRICS countries — Brazil, Russia, India and South Africa — increased. Hence, there are far fewer American imports from China on which tariffs could have an impact.
- Domestic impacts from tariffs on Chinese goods may be offset by China’s currently terrible economic conditions. The Chinese economy — wracked by the follow-on impacts of extreme overinvestment in real estate in a nation where the government owns all land and leases it out — is in increasingly abysmal state (and, as market economist Ed Yardeni says, “uninvestable”), with goods prices deflating apace. It’s hard to overestimate these impacts in an economy that’s 25% real estate, and all this may lead to China’s dumping products on the American market at far lower prices, offsetting the price impacts from U.S. tariffs.
- A surfeit of goods production in China. As the Chinese government wants to keep workers working, its manufacturers are producing more goods than it can consume, which will mean lower prices in the U.S., inevitably declining export volume, fewer goods on which to impose tariffs, lower net costs from tariffs for American consumers — and less economic and market impact.
- Widespread changes in the supply chains of American multinational companies since the pandemic. Remember the ships backed up waiting to unload at Long Beach once production resumed in China as the pandemic there waned? Vowing never again, many companies have since reconfigured their supply chains, relocating manufacturing plants from China to American soil (reshoring or onshoring) or to other nations, including Vietnam, Thailand and India. Few small companies have recast their supply chains because of the high expense involved, so the impact of new tariffs on China would likely be greater for them.
Aware of these trends, CEOs of various American consumer goods companies aren’t anticipating major impacts on their businesses.
Further, U.S. stock market impacts from potential new tariffs on nations other than China may not be as great as many investors may fear.
Net Exporters
It’s critical to distinguish market from overall economic impacts; the two shouldn’t be conflated. The U.S. economy is a net importer, as it imports more than it exports (hence the trade deficit). But the S&P 500 is a net exporter. Leading exports from these companies include agricultural products, machinery, finished vehicles, technology, electronic equipment, minerals, fuels and oils around the globe, primarily to Canada, Mexico, China, Japan and the United Kingdom.
So, while S&P 500 companies would feel an indirect impact from increased tariffs, perhaps from increased inflation and somewhat diminished consumer wherewithal to purchase products, negative impacts on many large companies may be overestimated.
Nevertheless, concerns about tariffs have increased as the usual Santa Claus rally failed to appear and the calendar ticked to the New Year.
Even the characteristically bullish Yardeni sees new tariffs as a potential cause for market concern—for now. But he believes the market impacts would ultimately be offset by the remarkable current strength of the U.S. economy and the robust corporate earnings that are widely forecast.
Not So Fast
Bloomberg reported Jan. 14 that Trump’s advisors are considering a gradual approach to tariffs rather than the rapid pace Trump indicated during his campaign.
Circumstances suggest that this pace will be gradual anyway, regardless of these advisors’ designs.
Trump’s legal authority to impose tariffs is limited; congressional approval is required for truly broad action. More than a few moderate Republicans in both chambers of Congress are concerned about tariffs’ inflationary impact. Even if they relent under partisan pressure, this will take time.
Additional delays will probably come from opposition to Trump’s preference of lumping tariffs in with his other main legislative goals, including extending tax cuts.
So investors may have a while to get a sense of how new tariffs might affect their stock portfolios.
***
Dave Sheaff Gilreath, CFP,® is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios,® an institutional money management firm. Based in Indianapolis, the firms are managing assets of about $1.4 billion, as of September 30.
Investments mentioned in this article may be held by those affiliates, Innovative Portfolios’ ETFs, or related persons.