Talking Clients Off the Trade War Wall of Worry

Advice to the Advisors

Trade Wars | Wall of Worry | Sheaff Brock Institutional Group | Climbing Wall

Talking Clients Off the Trade War Wall of Worry

Your clients aren’t the only ones expressing worries about trade wars—everybody appears to be talking about them, says CNBC’s Elizabeth Schultz, But trade wars are nothing new, she reminds viewers as she interviews International Monetary Fund historian and Princeton professor Harold James. After a period beginning with the Smoot Hawley Act in 1930, continuing through the ”chicken wars” in the 1960s and trade disputes with Japan in the 1980s, there ensued several trade war-free decades. Now, with President Trump’s announcements of tariffs and a 25% levy on imports from China (eliciting a retaliatory list of Chinese tariffs on U.S. farm products, autos, and energy), don’t allow clients to use the balance of trade as the newest brick in their Wall of Worry, causing them to abandon the long-term investment goals towards which you’re helping them navigate.

Trade today is many times more robust than in times past due to technology and innovations in transportation and logistics, notes Sheaff Brock Managing Director Dave Gilreath. And with richer countries buying more stuff than their poorer counterparts can, he observes, world trade will never actually be precisely “balanced.” (As just one example of balance of trade anomalies, in the U.S., he points out, we manufacture more steel than ever before in our history, but China can still produce steel more economically due to lower labor costs.) With countries today so much less insulated and so much more interdependent for goods and services, trade will not only continue—but continue to adjust its flows and find new “balance of trade” points on the actual “imbalance of trade” continuum.

Brian Wesbury of First Trust has an interesting take on the latest tariffs imposed by the Trump administration. He sees the tariffs as signaling an end to the “kid gloves” treatment of China, noting that China has used various methods to steal hundreds of billions worth of trade secrets and intellectual property, via espionage, counterfeiting, forced disclosures for market entry, and reverse-engineering of products. “One gets the sense the Administration is thinking that, at some point, China can’t retaliate because it’ll run out of items to tariff well before the US does. That’s the downside of China’s massive trade surplus…. Unfortunately, other strategies haven’t worked, and now the kid gloves are off. Let’s give it a little while and see if it works,” First Trust advises.

“Not all trade disputes end badly,” Professor James explained in the CNBC interview. Trade wars are disruptive, he admits, but trade “spats” help markets find the right balance. Every year since WWII, U.S. trade with Japan, for example, continued to grow, and tariffs gave the U.S. leverage to negotiate trade differences with Japan.

Will any tariff expense “drag” on the economy significantly? Indeed, says Strategas Research, as much as $120 billion. But, Strategas submits, tax policy is going to prove an $800 billion benefit to the economy, as shown in the chart below.

Trade Wars | Size of Tariffs and Fiscal Policy | Strategas Research

Meanwhile, Gilreath observes, small and mid-cap stocks are much less affected by global trade issues because their exports are a much smaller part of their revenue than the big multi-national companies. You may wish to discuss with investors concerned about trade wars shifting allocations to accommodate that reality.

In the final analysis, Gilreath concludes, trade imbalances won’t warrant a panicky climb onto the Wall of Worry.

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