With the news that President Trump has imposed tariffs on solar panels and washing machines (an interesting combination), the prospect of a trade war has moved to the front of the risk parade. What do these tariffs mean for your investments and the economy? Should we be worried? Despite the headlines, the answer is “not yet.”
Tough on trade?
Let’s take a look back at the past year since the election. The president ran on an explicit campaign to get tough on trade, particularly Chinese trade. Yet, until Monday, there had been a great deal of talk and no real action. While the move to withdraw from the Trans-Pacific Partnership was real, for example, it was more of a decision not to open the U.S. economy further, rather than to close it.
A negotiating tactic?
The Monday announcement is the first step toward real action. But for all the headlines, the impact is likely to be less than it appears. In all likelihood, these tariffs are a negotiating tactic. A trade war is in no one’s interests, but the rhetoric around negotiations can get very heated before pulling back. We are seeing signs of that in the NAFTA talks between the U.S., Canada, and Mexico right now. These tariffs are presumably just an opening salvo in an attempt to renegotiate the terms of trade with these countries.
Another primary reason this is more of a negotiating signal is the selection of the targets. China’s share of the solar cell market in the U.S. is just over 10 percent according to the Wall Street Journal—hardly dominant. The damage to China from this would be limited. In fact, the Shanghai stock market was up on Tuesday. South Korea is the country principally hit by the washing machine tariffs, yet the Seoul markets also rose. Both of these countries are also key players in the ongoing confrontation with North Korea and, therefore, unlikely targets for really damaging economic measures. So, while these measures are real, they are also very limited in their effects.
Again, consider NAFTA. Fierce rhetoric is matched with steady negotiation—on all sides. The likelihood remains that, in the end, a deal will be cut that preserves gains for every country. We should read the tariff announcement with that in mind.
Too early to panic
It is, therefore, too early to panic. At the same time, aggressive tactics do raise the stakes, and this is a new level of confrontation. The fact that the North Korea situation is also in play further complicates the picture. The risks, while not substantial at the moment, are certainly more than they were last week—and could rise.
What I will be watching for over the next couple of weeks is how and when China and South Korea respond—and whether they choose to impose tariffs themselves or instead either negotiate further or take the process to the World Trade Organization. The first would be more provocative and could more easily result in a tit-for-tat series of actions that could be dangerous. The second would likely mean the status quo would remain in force.
Watch the situation closely
Markets don’t seem worried, either here or in the two other countries most affected. I think that is the right approach. The possibilities, however, do warrant more attention going forward. I will be watching this situation closely and reporting here on the blog as warranted.