Viewpoints

“At some point in any negotiation you go, ‘We’re close to getting something done so we’re going to keep going.’ On the other hand, at some point you throw up your hands and say, ‘This is never going anywhere.’”


-  Mick Mulvaney, Chief of Staff for the Trump Administration

 

The tariff feud between the U.S. and China is a battle that seems to be on a long, meandering road to nowhere.  After campaigning on trade tariffs with China, implementing them, threatening to raise them further, President Trump appeared to strike a deal in the early part of this year.  Now the Administration has pivoted, threatening to hike tariffs on another $200 billion of Chinese imports.  After hitting all-time highs last week, the stock market has responded with volatile trading as increased uncertainty takes hold.  Here’s where we’ve been in the tariff negotiations, what changed this week, and what potential outcomes we may see in the coming weeks.

Actions Already Taken

  • The U.S. implemented tariffs of 10% on $200 billion of Chinese goods last September, with a plan to raise tariffs to 25% in December.

  • As formal negotiations started, the U.S. delayed the 25% tariff hike with hopes that an agreement could be made to even the trade balance.

What has Changed

  • China appeared resistant to formalize a plan to stop intellectual property theft, a key demand from the U.S.  The U.S. is also seeking to retain flexibility to hike tariffs is China doesn’t follow through on its promises after the deal is made.

  • President Trump has been encouraged by strong jobs data, solid GDP growth, and the stock market near all-time highs.

  • The combination of these two factors has emboldened President Trump to threaten to raise tariffs to 25% unless China agrees to the concessions the U.S. wants.

What Stays the Same

  • The U.S. and China both want to get a deal done.  Bloomberg estimates that a tariff increase to 25% would result in a 1.5% reduction in U.S GDP growth.

  • President Trump wants to be reelected and a strong stock market will be a key factor for many voters heading into the 2020 election.  Given the volatility in the market as the initial hike in tariffs took place last year, and this week, after further tariffs were threatened, he is playing with fire.

Where Do We Go from Here?

  •  As long as a deal is not done, volatility will continue in the stock market.  Tariffs raise costs on consumers and corporations, and casually threatening to raise costs on billions of dollars of goods does not instill confidence for corporations and their forward outlooks.

  • The odds still favor a deal getting done.  Trump’s major tailwind is economic and stock market strength, which can dissipate quickly as trade threats continue.

  • With candidates gearing up for the 2020 general election, and Joe Biden polling very well against both Democrats and Trump, President Trump will need to make sure his core campaign message – strong economy and stock market – is running at full speed.

Short-term volatility is of course frustrating to undergo but it is important to remember that it is a feature, not a bug, of the stock market.  In January, it seemed as though a trade agreement was on track while this week has caused many to throw their hands up and believe the deal is never going to happen.  While it may persist as long as the U.S. and China continue to play hardball, the motives for both parties continue to tilt towards carving out a deal.  We will of course remain vigilant in monitoring client portfolio allocations as the tariff story plays out and appreciate the trust you have placed in us.

Investment advisory services offered through Independent Financial Partners, a Registered Investment Adviser

WhartonHill Investment Advisory is not owned or controlled by Independent Financial Partners

The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.