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Tariff Context

| April 02, 2018

Among the concerns rising up to bedevil the markets lately, the chief culprit is most likely trade tariff rhetoric and concerns of a trade war. Including the infamous Smoot-Hawley Tariff Act, signed into law in June 1930 and blamed by many for catalyzing the Great Depression, history is rife with evidence that actual trade wars are not productive and certainly not easy to win.  Trade hostilities would be harmful to the global economy and are one of several wild cards that could derail the bull market.

That caveat aside, a little context is in order. At present, the approximately $60 billion in tariffs threatened against China, covering everything from washing machines and solar cells to steel and technology, amount to about 10% of China’s total exports to the United States, according to Capital Economics. Furthermore, Citigroup estimates that even a 45% tariff would only lower China’s GDP by about a quarter of 1% (0.25%). Since China’s GDP growth runs at well over 6%, the impact on China’s economy would be negligible at best, assuming that a full-blown trade war is not in the offing.

So far, the back and forth between the US and China contains more bark than bite. That is to be expected, allowing both nations room to negotiate. We saw a similar approach in the recent round of NAFTA negotiations in early March, with major players such as Canada, Mexico, and the European Union all exempted. US Commerce Secretary Wilbur Ross was quoted as favoring negotiation over fighting. We think odds favor an eventual outcome that both countries can live with.

We are not alone in believing that some pushback is in order against previous Chinese trade practices.  The US Trade Representative report released on March 22nd specifically cited unfair Chinese trading practices and intellectual property theft going back years. China runs large trade surpluses with the US while imposing tariffs on US goods and services that are significantly higher than those going the other way. Note the contrast with major trading partners Germany and Japan, where the relationship is more symmetrical even with similarly large trade surpluses. So while markets may not appreciate the uncertainty, it makes sense for the US to seek a fairer trade relationship with China.

As always, we here at MPCA will monitor myriad indicators both fundamental and technical for direction in this period of heightened, although more historically normal, volatility.  We stand ready to take defensive measures if our indicators and conditions warrant.

Information from Riverfront Investment Group was used in generating this report.