Protectionism or Posturing?

February closed as one of the worst months for both credit and equities since the beginning of 2016.  And then to kick off the first two days of March, President Trump’s embrace of protectionism in the form of threatened tariffs caused even more distress among investors.  Trump hinted that he intends to unveil new tariffs next week (about 25% on steel and 10% on aluminum).  Higher input costs and a margin squeeze are the first-order implications of tariffs.  There is also a chance that imposing tariffs on two critical global industries will elicit a response from our four largest trading partners (EU, China, Canada, and Mexico).  The question is how any of these trade partners might retaliate, what mechanisms make that possible under existing agreements (NAFTA, KORUS, etc.), and what the market will start to handicap as logical outcomes.

Market bulls will seek to downplay the potential effects while the bears will show the chaos that can unfold from retaliatory trade measures and how this action will poison NAFTA.  However, what’s going on with the equity market may actually be a very positive development on the tariff issue.  Apparently Trump’s thought-process on the tariffs is: “so what if people pay a little higher prices—we’re going to have a lot more jobs here.”   Despite Gary Cohn and the globalist wing’s repeated warnings that broad duties could ignite trade wars and ultimately harm US consumers, they made zero progress and Trump went ahead with his tariff announcement. The equity market reaction could be the external event needed to get the president’s attention that this may have some seriously negative consequences.  It’s not the steel and aluminum tariffs but the possibility of retaliation.

Hopefully this is all just posturing by President Trump. With Xi Jinping’s top economic advisor, Liu He, visiting the White House this week and the latest round of NAFTA talks wrapping up, this confrontational trade rhetoric could all end up seeming somewhat predictable in hindsight.

While the steel and aluminum tariffs would be bad, I think it makes sense to be more concerned with Section 301 (China and intellectual property stealing), because those tariffs can be in the hundreds of billions of dollars, and would represent a true macro risk—particularly if you own companies with a lot of exposure to China.  So that’s really the key issue to be watching.  Nonetheless, both issues and potential retaliation are super important and will be a key focus of next week.  Hopefully this is just posturing by President Trump, because if cooler heads do not prevail, everyone will lose.

My Top 10 Reads of the Week:

  1. WSJ: Gary Cohn’s Future Unclear After Setback on Tariffs
  2. The Economist: Vladimir Putin, the Meddler
  3. WSJ: How SoftBank, The World’s Biggest Tech Investor, Throws Around its Cash
  4. Ray Dalio: A US-China Trade War Would Be a Tragedy
  5. The Economist: The Right Way to do Brexit
  6. The Economist: Tackling Fannie and Freddie
  7. Wired: What Would A ‘Healthy’ Twitter Even Look Like?
  8. WSJ: US Will Be the World’s Largest Oil Producer by 2023, Says IEA
  9. TechCrunch: When Venture Capital Becomes Vanity Capital
  10. The Economist: How the West Got China Wrong

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