The Independent Market Observer

A New Round of Tariffs: Keep Calm—But Pay Attention

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Mar 22, 2018 3:36:40 PM

and tagged Commentary

Leave a comment

new round of tariffsThe economic news today should be about the Fed and how its new chairman sounded at the press conference yesterday. Indeed, there has been some commentary on that, and it was largely good. But any Fed news has been overshadowed by the expected (now confirmed) announcement from the White House of a new round of tariffs on China. Markets have taken note by heading down, so that is what we will be discussing today.

Haven’t we seen this before?

In some respects, we have seen this movie before—and quite recently. When the administration announce planned tariffs on steel and aluminum, markets dropped on fears of a trade war, only to largely bounce back. That bounce has proven justified, as subsequent exemptions and negotiations have shown that whatever the administration’s initial intentions, the actual impact was going to be much smaller. Even Trump himself, in selecting his new chief economic advisor, referred to tariffs as a “negotiating tactic.” Much of the concern, looking back, seems to have been misplaced.

Is China a different story?

China, the current target, may be a different story. For starters, one of the reasons the administration pulled back on the steel and aluminum tariffs was that they would have hit our closest allies the hardest. You really don’t want to start a war—trade or otherwise—with your best friends. The second reason was that steel and aluminum tariffs would have cost many more jobs than they created. So, even on their own terms, it would have been a bad deal. As a negotiating tactic, it may make sense. But as actual policy? It was very risky, which made it easy to back off.

Tariffs on Chinese goods are the direct opposite of the earlier tariffs. China is not an ally but rather an increasingly powerful competitor in both economic and military terms. We don’t mind imposing costs on China. Moreover, the goods that the new tariffs will be targeting are those that will do less damage to the U.S. economy and consumers, meaning the downside here will be much less. The administration has clearly learned from its last round, and it has designed these tariffs to avoid the major concerns raised then.

What are the risks?

On one hand, this is a good thing, since the tariffs will be more effective and less damaging and will therefore be easier to actually implement. From a policy perspective, this is exactly what the administration wants. On the other hand, while the immediate risks are lower, the mid- and long-term risks are actually higher.

As I wrote three weeks ago, the short-term effects of tariffs can be damaging, and that is what the new tariffs are apparently designed to minimize. The second-order effects, however, are likely to be just as bad. According to the media today, for example, China is already preparing retaliatory tariffs designed to cause damage to the U.S. economy, as well as political damage to states that supported President Trump. The problem with starting a war is that both sides get to play, and the other side likely won’t play fair. The economic damage from the tariffs, although lower, is certainly not zero. The damage will be real, it will probably be substantial, and it will mount over time. For companies that sell to China, or indeed any country outside the U.S., the effects are likely to be negative—which is why markets are reacting again. Even the best-case results would still be worse, economically, than where we are now.

Not time to panic

Just as with the last round of tariffs, it is not time to panic. This may very well turn out be a negotiating tactic again, in which case the damage is likely to be brief. Each time, though, the risks get higher. In this case, given the political incentives to keep hitting China, I think the risks are even higher than the last round.

Keep calm—but pay attention.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®