TARIFFS

The last week or so has been dominated by tariff talk. Those firmly against the tariffs argue that they will be inflationary and will upend both domestic and global growth. Those for the tariffs argue that the U.S. needs to level the playing field.

The following graphic was developed by the investment team of Knights of Columbus Asset Advisors using data from the World Trade Organization, World Bank and Bureau of Economic Analysis. The key focus of this infographic is to look at trade through the lens of “free trade.” The blue part of the bar focuses on the actual tariff rate and the orange part of the bar focuses on collective “non-tariff” barriers and includes items such as Registration, Licensing, Packaging and others.

In analyzing this data, it appears that only Australia has lower tariff rates and only Mexico has lower non-tariff barriers. In other words, the U.S. has the lowest barriers allowing foreign products into our markets. For many years, as an example, China exported deflation to the U.S. in the form of cheap goods that we could find in discount retailers across the country. In effect, these lower-priced goods were a factor in keeping our inflation rate in check.

I wanted to provide this analysis because I have been receiving numerous questions from colleagues and clients regarding the “tariff situation.” In some cases, people thought we were firing the first salvo in the tariff tug-of-war. Ultimately, it appears, that the administration is attempting to level the playing field by placing a tariff on foreign products in the same way foreigners place a tariff on U.S. products. As the largest economy on the planet, there are some who argue that the U.S. should have low tariffs. These low tariffs allow us to import cheap goods and help drive global growth and the positive outcomes associated with increased living standards. The Trump administration is seemingly arguing that the U.S. needs to be on an even footing with our trading partners. This will continue for a while and will cause strong arguments from both pro and anti-tariff groups.

The tariff debate leads to the inevitable question of how investors should consider the current tariff rhetoric. My primary argument is centered on the entire tariff situation. Tariffs can be enacted or relaxed with warp speed. Trying to guess the direction or level of tariffs is about as productive as trying to time markets. Further, investors are trying to understand the path of inflation and the Fed’s next moves. We continue to believe that the Fed will remain on pause until there is ample evidence illustrating that inflation is trending towards their long-term goal of 2%. For the moment, at least, tariffs are likely going to stoke a concern for inflation. The Conference Board’s Consumer Confidence Inflation Expectation for the next 12 months stood at 6.0% at the end of February and this was a sharp acceleration from 5.2% at the end of January, thus fueling a concern for higher inflation^[1].

We believe the Trump administration will continue to push their tariff agenda because they believe it will put U.S. trade on a more level playing field with the rest of the world. We believe that this will keep the capital markets in a more volatile state, but we think it will be equally hard trying to game, time, or trade these short-term fluctuations.

More to come!

[1] Source: Bloomberg