On Wednesday last week, US President Trump announced a range of tariffs aimed at trading partners across the globe.  The tariffs are supposedly intended to protect domestic industries and to reduce America’s trade deficit.  Unsurprisingly, the announcement sparked international condemnation.

The assertion that tariffs will bolster US manufacturing is misguided – any positive effects would take far longer than Trump’s four year Presidential term – and the suggestion that tariffs will reduce America’s trade deficit is far too simplistic.  The Trump administration has focused on the trade of goods, ignoring the significant trade surplus it achieves in services.

Furthermore, although Trump’s tariffs aim to target countries with which the US has large trade deficits, the global minimum 10% tariff predominantly hits countries with which it has trade surpluses.  According to its own trade figures, the US has a trade deficit with only 14 of the 122 countries being handed the 10% tariff. For example, the US currently achieves a trade surplus with the UK.

Historically, protectionist tariff policies have proven to be detrimental to trading partners, but here the greatest damage will be inflicted on the US domestic economy.  US households are excessive consumers, accounting for a whopping third of global household consumption.

If allowed to continue, the tariff plan will backfire spectacularly.  By raising the cost of imports, prices will rise for US consumers and production costs will rise for US businesses, inevitably leading to the twin spectres of higher inflation and slower economic growth.  Moreover, retaliatory measures from other countries will cause further harm to American exporters, undermining the very industries the tariffs aim to protect.  The political backlash has already started, with Republican Senators breaking rank and expressing concern about the impact on US farmers and key trading alliances.

Ultimately, the tariffs are unlikely to persist, in their current form at least.  Although it is foolish to attempt to understand Trump’s true motivations, the tariff plan appears to be dramatic posturing, to encourage negotiation.  In Trump’s 1987 book “The Art of the Deal” he advocates starting negotiations with bold, extreme positions to gain leverage.  Trump has described the sweeping tariffs as giving the US “great power to negotiate,” which aligns with the book’s emphasis on using aggressive tactics to compel opponents to engage.  America’s trading partners must now choose to retaliate or negotiate.  China has chosen not to kowtow, but to retaliate, whereas others, such as Taiwan and Vietnam, have already offered Trump zero tariffs.

For global investors, this period of economic uncertainty and volatility in markets will be unsettling, but the disruption may also present opportunities.  In recent years, the US equity market has become expensive, and the focus on tech companies has left other sectors undervalued.  Outside of the US, new trade deals will be struck, and new supply chains will emerge.  The market moves of the last few days are based on fear rather than fundamentals.  The sheer number of variables in play make it hard to forecast with any certainty.  Ultimately, how quickly can trade negotiations begin and long can Trump withstand the backlash coming his way.

In conclusion, while US tariffs represent a serious challenge to the global economy and markets, they are unlikely to endure given their impact on the American economy, its consumers and its businesses.  It is important to maintain a long term perspective and be opportunistic in light of expected realignments in international trade.