Tariffs and Trade Trigger Volatility
The announcement of a 25% tariff on imported steel, and 10% on aluminum, caused fears of a trade war, triggering volatility. Tariffs will benefit domestic producers of steel and aluminum, but at the same time, they will hurt the many manufacturers using these materials – as well as consumers.
Higher steel and aluminum prices would increase costs in machinery, aerospace, auto, and construction. Still, overall, steel and aluminum only account for 1% of national income and 2% of total U.S. imports, so the direct impact on overall import prices is 50 bps.1
By itself, that’s not enough to derail the economy, but the key factor to watch is the risk of retaliation from trading partners. Previous examples of steel tariff hikes, in 2002 and 2016, did not trigger significant retaliation, but several countries have now issued statements threatening retaliation. This bears watching!
The White House has also signaled a new focus on “reciprocal” tariffs in areas where trading partners levy higher tariffs on U.S. products than the U.S. levies on the same imported goods. That would raise the cost of a wide range of imports from China, boost inflation, and potentially lead to retaliation against key U.S. exports.
Average Tariff Rates
|Most Favored Nation (MFN)
Average Tariff Rate
|United States of America||3.5||3.5|
Source: World Trade Organization (WTO), as of December 30, 2017. A Most favored nation (MFN) is a tariff applied to a country with most favored nation status. An MFN tariff is the lowest possible tariff a country can assess on another country.
If a trade war were to happen, it would raise concerns about both inflation and the supply chains of large multi-national corporations. Investors should consider positions in companies with more revenue generated at home, such as small cap stocks, and commodity sensitive assets to hedge against the rising inflation risks.
1. Capital economics, as of March 1, 2018.
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Most favored nation (MFN) is a tariff applied to a country with most favored nation status. An MFN tariff is the lowest possible tariff a country can assess on another country.
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