June 25, 2018

Weekly Market Commentary

June 25, 2018

The Markets As Yogi Berra once said: It’s déjà vu all over again. Also a nickel ain’t worth a dime anymore.

Since tariffs have become such a major headline again I thought I’d resend my comments I put together on March 5th of 2018. It should put some perspective on the issue probably not being shared by the media outlets.

Tariffs tend to spark fierce debate about protectionism and free trade. Proponents suggest tariffs may protect domestic companies and create jobs. Critics suggest tariffs may slow economic growth and drive prices higher.

Here’s the thing: tariffs don’t always produce the anticipated results. Let’s take a look at two examples while keeping in mind that World Trade Organization rules do not allow countries to impose new tariffs unless they are ‘safeguards’ intended to protect a domestic industry.

In 2002, President George W. Bush imposed a tariff on steel. While the WTO was deliberating about the action, “…the European Union ended up hitting Bush where it hurt. The bloc planned tariffs on a wide range of products, including many produced in key swing states where job losses could hurt Bush’s chances of re-election,” reported Time. The WTO eventually decided the tariff was illegal. Eventually, in 2003, the tariff was removed.

In 2009, President Obama imposed a safeguard tariff on Chinese-made tires. China retaliated by restricting imports of American chicken feet (a culinary treat in China), reported The Economist. At the time, U.S. exports of chicken appendages were valued at about $278 million. Guess what happened?

Far fewer Chinese tires were exported to the United States. However, tire imports from South Korea, Thailand, and Indonesia doubled, more than offsetting the decline in Chinese-made tires, reported the Council on Foreign Affairs. On the other side of the tariff tiff, U.S. poultry exports to China fell, but U.S. poultry exports to Hong Kong rose. As they say, when one door closes, another door opens. It seems logical to me that this will probably repeat itself on these tariffs.

In the big picture, it’s unlikely U.S. tariffs on steel and aluminum will have significant impact on China, the reported target of the new steel tariffs. After all, China ranks eleventh on the list of nations sending steel to the United States, reported National Review. Most U.S. steel is imported from U.S. allies such as Canada, Mexico, and South Korea. On some level it seems probable that this tariff will evolve much like these other ones. Another point to be made is the latest conflict if placed only represents 1% of China’s GDP.

Focus on the Positive “A person with an idea is  a crank until the idea succeeds.” –  Mark Twain