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Tariffs, Trade Wars, and Kim Jung Un

| June 25, 2018

A few months ago, he was “Little Rocket Man.”  Two weeks ago, he was sitting face to face with the President of the United States.  He, of course, is Kim Jung Un – leader/dictator/human rights ignorer of North Korea. Unthinkable in most circles, but a reality nonetheless. How and why did things turn in the way they did? Your guess is as good as mine, but I think two things came into play:

  1. The initial name calling was a whole lot of posturing.
  2. Both parties realized the ramifications of continuing down the terrible path towards nuclear war.

Why do I mention this? It is not to start our own version of a nuclear war by mentioning the lightning rod that is President Trump. We prefer to stay out of political commentary, and instead focus on economics. Unfortunately, these two things are not mutually exclusive – and all too often are more intertwined than an investor would prefer. Instead, I mention it to bring us to the topic of tariffs and trade wars, which are being blamed for the recent downturn in the financial markets.

To start, let’s make it very clear – a “tariff” is a fancy trade-related word for “tax.” It is an import tax assessed on a chosen good or set of goods, usually with the intent of changing behavior somewhere and at some time in the economic universe. “Retaliatory” is an adjective often found in front of the word tariff, as they can be used to levy pressure on a country in response to other tariffs or any number of geopolitical actions by the opposing nation. Make no mistake, before this latest round of headline grabbing trade banter, we did not live in a tariff-free world. Our trade relationships are complex, and have not always evolved to reflect an evolving global economy. Changes are probably justified, but trade wars are not (in our opinion).

If you can’t tell by now, we at MPCA are generally not big fans of tariffs. These taxes disrupt the normal flow of economic activity, distorting supply and demand dynamics, increasing costs to consumers, and generally lowering standards of living globally. They may lead to favorable outcomes for the aggressor in the short-run, but rarely help the economic well-being of any group over the long-term. It is our belief that free trade and capitalism have been the main drivers of global poverty rates falling to record lows over the past decade, and we want nothing to do with actions that might reverse this trend.

Now back to the question of why did I start with Kim Jung Un? It is because I hope (and somewhat expect) that we will see a similar pattern emerge with these tariff discussions. A few big, bellicose shots across the bow have gotten things started. These shots have roiled financial markets – largely because of the uncertainty created by all of the bantering. Markets hate uncertainty, as do business owners who face decisions on how to best allocate their resources. The question now is “Will cooler heads and better policy emerge once all parties realize that continuing down this path will lead to an end-result in which no one wins?” If yes (which we believe will be the answer), what we will have then, hopefully, is a better set of trade rules that continues to allow companies, countries, and regions to allocate resources in the most efficient manner possible, and thus raise living standards across the globe.