New Tariffs: Impact and Implications

by: , Director and Portfolio Manager, New York Life Investment Management

On Thursday, President Donald Trump unexpectedly announced a plan to impose tariffs of 25% on imported steel and 10% on aluminum at a White House meeting with major U.S. steel and aluminum executives. Trade protectionism was a key element of Trump’s presidential campaign, and we have already seen multiple actions on this front. Thus far, the President has backed out of Trans-Pacific Partnership (TPP), slapped steep tariffs on lumber, solar panels, and washing machines, and negotiated a hard line on North American Free Trade Agreement (NAFTA).

The most recent announcement has been justified as a way to address trade imbalances that benefit other countries, as well as to curb imports deemed to be a threat to our national security. This was based on studies conducted by the Commerce Department that concluded metal imports threaten to impair the country’s capability to make key material for military equipment. Wilbur Ross, the U.S. Secretary of Commerce, had also recommended a more targeted approach aimed at certain countries. The exact details would only be available when the President signs the formal order next week.

U.S. Steel Imports – Top Ten Sources*

top u.s. steel importers

Source: U.S. Department of Commerce, *Based on 2017 Data through September 30, 2017.

The Defense department cautioned against a backlash from close allies and the reaction from the markets wasn’t positive either. The move was criticized by U.S. manufacturers, as higher input costs will make them less competitive.

Automakers led the decline in the industrials sector which, at -1.9%, was the worst performing sector for the day. Overall, large-cap equity indices were down more than 1% on Thursday, significantly underperforming their small-cap counterpart, the latter of which derive much of their sales in the U.S. On the other hand, as expected, shares of metal producers like AK Steel and U.S. Steel were up significantly.

Bottom Line

These developments have serious implications for investors, as trade wars can pose a larger risk to company earnings and the global economy. There are also risks of an uptick in inflation, which has already been a cause of concern for investors. Small-cap companies may experience a limited impact, since they are more domestically oriented. To protect capital from inflationary pressures, investors may also consider commodity-sensitive equities and assets.

It is interesting to note that China is not one of the biggest sources of steel or aluminum imports in the U.S. The administration launched a Section 301 investigation of China last year, and is keen on implementing measures to penalize China for its unfair trade practices. There may be more targeted actions coming in the near future, and it would be prudent for investors to identify parts of their portfolios that are exposed to trade with China.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in this material will be realized.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Foreign securities may be subject to greater risk than domestic investing. These may include securities markets that are less efficient, less liquid, and more volatile than those in the United States, as well as foreign currency fluctuations and different governmental regulatory concerns.

Small and mid-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks due to their limited product lines, markets and financial markets.

Commodity: Investments in instruments and companies that are susceptible to fluctuations in certain commodity markets. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S-4 events, regulatory developments or other factors) could have an adverse impact on those companies.

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

The Trans-Pacific Partnership (TPP) is a proposed free trade agreement linking the United States and 11 other Pacific Rim economies. In 2015 Congress gave Barack Obama fast-track authority to negotiate the deal and put it to an up-or-down vote without amendments; all 12 nations signed the agreement in February 2016. The following August, Senate Majority Leader Mitch McConnell said there would not be a vote on the deal before Obama left office. Since both major-party nominees, Donald Trump and Hillary Clinton, opposed the deal, it was considered to be dead on arrival. Trump’s victory solidified that view, and on January 23 he signed a memo instructing the U.S. trade representative to withdraw the U.S. as a signatory to the deal and pursue bilateral negotiations instead.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302.

1768052

Amit Soni, CFA

Director and Portfolio Manager, New York Life Investment Management

Amit Soni is a Director and Portfolio Manager in the Strategic Asset Allocation & Solutions (SAS) team at New York Life Investment Management. He focuses on quantitative and macro-economic investment research and portfolio management for the asset allocation

Full Bio

1 Comment

Leave a Reply

Your e-mail address will not be published.