The Trump Tariffs: Three Reasons The Sky Is Not Falling

Politics are taking center stage as the U.S. and China duke it out in the early rounds of what is looking to be a full-blown trade war.

After yesterday’s announcements of the United States placing a 25% tariff on a basket of Chinese imports, China hit back with tariffs of their own. In what the media is dubbing a “measured response,” China raised the rent on $3 billion worth of U.S. imports. Also, legal action against the U.S. was promised at the World Trade Organisation (WTO).

In the last 24 hours, safe-havens are up and stocks have been crushed around the globe. Investors are running for the hills as no one is quite sure of how to price the impact of a U.S./China trade war.

Chinese equities crashed in the overnight prompting government intervention to restore orderly markets. The New York cash open has brought some relief to U.S. equities. The DJIA and S&P 500 opened moderately in the green.

Important Considerations

Markets hate uncertainty. The new tariffs have brought that in buckets. Is the U.S./China trade situation the time bomb it is portrayed to be? Below are a couple of things to think about that you are not likely to hear on CNBC or Fox Business:

• Brexit Is Coming: The impact of Brexit is going to be huge for international trade. The U.K. will be able to negotiate independent trade deals for the first time in over 40 years. With the U.S. and China at odds, a rekindled U.S./U.K. primary trade alliance is likely in the works. Perhaps the return of British steel to America on a duty-free basis?
• China Holds Debt: In December of 2017, China held $1.2 trillion in U.S. debt, the single largest foreign participant in U.S. Treasuries. This is a big reason why China is likely to respond in a “measured” fashion to all provocations — the benefits of a healthy U.S. economy greatly outweigh those of a prolonged standoff.
• A Surprise? Really?: Does anyone believe that Thursday’s tariff announcements surprised those involved in China’s export sector and government? Trade reform with China was a pillar of Trump’s 2016 presidential campaign — there is a very good chance that this move came as little surprise to those in the know.

Bottom Line

Add these factors up and you get a fluid situation that is going to settle down. The truth is, there is no money to made from a lengthy trade war. I expect compromise from both sides and long-term resolutions to be put into place by the end of the year. In short, the sky is not falling.

However, the common theme in most of the tariffs media coverage is that the sky is indeed falling. Talking heads cite President Trump as having “gone rogue,” with some calling for the courts to intervene and stop the new tariffs. Remember, many of the same media outlets called a vote in favor of Brexit “improbable,” and the election of Trump a “longshot.”

At the end of the day, these moves by the Trump administration should not come as a surprise to anyone. If anything, it is a surprise that the new tariffs took this long to enact.