On Thursday, March 1, President Trump announced a new plan to institute a 25% tariff on steel imports and a 10% tariff on aluminum. Like so many things these days, the response was radically different depending on who you talk to. More on that in a moment.
Traditionally, tariffs are something most of us don't have to think about, especially as tariff levels in the United States have been low for decades. But for investors, President Trump's announcement has the potential be very significant. Why? Because of the possibility that it could spark a trade war.
Should a trade war actually happen, it could have a major impact on investors. To understand why, let's have a short Q&A session.
What are tariffs and why do they matter?
Since it's probably been a while since your Economics 101 class, let's quickly cover a few basics.
Once upon a time, tariffs in the United States were both high and common. But after World War II, average tariff rates dropped significantly, and have stayed low ever since. In fact, since the 1970s, the average tariff rate on imports has been well under 10%.
Remember how we said the response to President Trump's announcement was radically different depending on who you talk to? That's because a tariff's effects can vary wildly, too.
Tariffs can bring two major benefits:
1. Because tariffs are a kind of tax, they can bring more revenue to the government.
Unfortunately, tariffs can also cause some very negative side effects.
We live in a global, interconnected world. Toss a stone into the water off one shore and the ripples can be seen near another. In this case, higher tariffs can cause some very large ripples.
Trade wars are risky things, because they can quickly jump from industry to industry. Let's take the current situation as an example.
After President Trump announced his plan to raise tariffs on steel and aluminum, the European Union threatened to do the same to U.S. imports - everything from motorcycles to bourbon to bluejeans. Other countries like Japan and Canada, which are both major steel producers and important trading partners, have threatened similar measures. Should all this happen, the currents of international trade will quickly become choked. That would lead to higher prices on manygoods and services, which in turn would lead to lower profits, higher costs of living, and even - potentially - higher unemployment.
Should all those things happen, the markets will surely suffer. As an investor, you don't need me to tell you what that means.
So why did President Trump decide to raise tariffs?
Geopolitical economics is a loaded topic, and there's a lot of disagreement out there about causes and effects. Again, tariffs can unquestionably bring lots of advantages, and there's no question the United States is on the lower end of a trade imbalance with many countries.
At the same time, there's also no question that Trump's announcement has spooked both the markets and the global economy. The Dow fell more than 400 points on the day of the announcement, and continued to fall the next day. Many world leaders have already warned about a trade war being a very real possibility. Even many Congressmen in President Trump's own party have spoken out against the prospect of higher tariffs. This isn't surprising, because the Republican party - or at least a large percentage of it - has traditionally been very much in favor of free trade.
minimized.) And we don't know what other nations will do in response.
What we do know is that the possibility of a trade war can have a substantial impact on the economy and the markets.
At the moment, we don't believe we need to take any action. Back in February, the markets took a hit due to the threat of inflation and rising interest rates - and then recovered. While the markets dipped slightly in response to President Trump's announcement, it's far too early to make any changes to your portfolio.
However, this is why our advisors and the 360 Team keep such a close eye on what's going on in the world. Part of our job is to keep our clients informed of any ripples in the water so that you always stay afloat. It's impossible for us to say what's going to happen next, but we can tell you this: We'll always be here keeping our hands on the tiller.