TARIFF TALK

On April 2^nd,President Trump announced his updated tariff program. A minimum tariff of 10% will be levied on all goods imported into the U.S. and this becomes effective on April 5^th at midnight EDT. Beyond the base tariff, there will be higher tariffs levied against those countries where the U.S. has the highest trade deficits, including China (34%), the European Union (20%), Japan (24%), and South Korea (25%)^[1]. This is not an exhaustive list of countries with extra tariffs. Canada and Mexico have a menu of tariffs that range from 0% up to 25% on goods not covered by previous trade agreements^[2].

The markets were up yesterday believing that the levied tariffs would be less than everyone feared. The opposite proved to be true, and the tariffs were far more extensive. As I type this note just before 10:00 AM EDT, the Dow is down nearly 1,360 points representing a loss of -3.22%, the S&P is down about 200 points, or a loss of -3.55%, and Nasdaq is down about 815 points, representing a loss of -4.63%^[3]. This announcement caused equities to move even more negative for the year with the S&P down nearly 8% and the Nasdaq down about 14%^[3]. Bonds have rallied sharply, with the 10-year Treasury standing at 4.02%, down from 4.57% at the start of the year^[3]. The risk of sentiment is very large right now. On the bond side, we may also see that credit spreads may be more biased to widening.

The President believes that the tariffs are needed to level the playing field because of the trade deficits we have with many countries. We agree that the U.S. has the freest trade among developed nations. I am a little more suspect on the ability to create a major shift into manufacturing because the cost structure in the U.S. is much higher than other parts of the world. Companies may seek to wait out the Trump administration to see if the next President is truly focused on keeping the tariffs in place or if President Trump decides to relax the tariffs. Globalization was certainly unsteady in that there were winners and losers. The rust belt in the U.S. certainly saw their share of real economic hardship. This trend took years to put in place and will take a period of time to make fundamental changes to the global supply chain and move manufacturing back to the U.S. Time will tell if this strategy is successful.

There will be a lot more to come so stay tuned. Also, we believe that markets will remain volatile until there is a clearer picture. Growth estimates are being cut, inflation expectations are increasing as a result of the tariffs as well as the various stances that other countries are taking with respect to the President’s tariff decision. We will provide our updated view as the markets digest this change.

[1] Source: Annex-I.pdf

[2] Source: Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits – The White House

[3] Source: Bloomberg