Investors have faced several market concerns early in the year around tech stocks, interest rates, and government policy. Among these factors, it’s no surprise that trade policy has emerged as particularly significant for markets. President Trump has launched various trade measures, including tariffs on Canada, Mexico, China, and the European Union. How should investors react to these news headlines?
For long-term investors, it's important to maintain perspective as the situation evolves and to stay focused on what you can control. Recent events have shown how quickly headlines can shift, and tariff threats are not a guarantee that they will be enacted. This is because the Trump administration has multiple objectives when imposing tariffs beyond protecting American industries. Tariffs are also used as a means of negotiating with other countries to impose border control, prevent the influx of illegal drugs, and to raise government revenue.
The U.S. runs a significant trade deficit
The U.S. has a long history of using tariffs to protect domestic industries, a concept known as protectionism. This dates back to at least the Industrial Revolution when tariffs supported American manufacturing. Later, the McKinley Tariff of 1890 raised import duties to nearly 50% on many goods, marking one of the highest tariff rates in U.S. history. The Smoot-Hawley Tariffs of 1930 still serve as a cautionary tale since they slowed global trade and are thought to have worsened the Great Depression.
These historical experiences led to decades of more open trade, including the establishment of international trade organizations. In theory, free trade works well when each country can focus on what it does best, selling its products and services to benefit all nations. While this fueled global economic growth, it also had the negative effect of displacing American workers as manufacturing shifted to countries with lower labor costs.
In many ways, the pendulum has swung back toward protectionist policies, with President Trump's renewed focus on using tariffs as a key policy tool, just as he did during his first administration. The chart above shows that the U.S. operates with a significant trade deficit since we import far more than we export.
Recent trade actions include a new 25% tariff on steel and aluminum that could apply to all trading partners, reciprocal tariffs on those that impose duties on American goods, postponed tariffs on Canada and Mexico, and additional tariffs on China. China's counter-response includes new 15% tariffs on energy imports and 10% on various U.S. industrial and agricultural products, echoing the 2018-2019 trade disputes. This pattern of escalating tariffs has sparked concerns of an emerging "trade war."
The role and importance of tariffs have changed over time
Market reactions to tariff announcements often prove more dramatic than their actual economic impact. During Trump’s first term, markets generated healthy returns despite fears of trade wars. The trade disputes of 2018 and 2019 did not result in the severe global consequences many anticipated. Tariffs during this time were used as a negotiating tool, resulting in the United States-Mexico-Canada Agreement (USMCA) and a trade deal with China.
In the chart above, tariffs fall under the “Other” category and contribute only 1% to 2% of total government revenue, highlighting how insignificant they are relative to taxes. That said, many politicians and economists would like to see the trade balance improve. This could potentially strengthen domestic manufacturing, increase employment in export-oriented industries, and reduce reliance on foreign borrowing.
On the other hand, the trade deficit also reflects the underlying strength of the U.S. economy and consumer purchasing power. When Americans have more disposable income, they can afford to buy more imported goods, naturally leading to a larger trade deficit. Furthermore, the deficit is partially offset by significant capital inflows into U.S. markets, as foreign investors seek the stability and opportunities available in American assets. This investment helps fund innovation, business expansion, and job creation domestically.
The dollar has strengthened since the election
Trade concerns have also led to a stronger dollar since last year’s presidential election. This is because trade and currencies are fundamentally linked. Importing foreign goods requires selling dollars to buy other currencies, so reducing these imports strengthens the dollar. As the chart above shows, the dollar has risen in value against many major currencies over the past several months.
Another impact of tariffs is the potential effect on consumer prices and inflation. When tariffs are imposed on imported goods, businesses often pass these additional costs on to consumers in the form of higher prices. This inflationary pressure is particularly noticeable in sectors heavily reliant on international trade, such as consumer electronics, automobiles, and household goods.
So, it’s important for investors to keep these developments in perspective. Tariffs have multiple objectives, not all of which should affect financial markets in the long run. While they can cause financial uncertainty, impact the U.S. dollar, and potentially lead to higher consumer prices, past episodes also show that markets can perform well in spite of these concerns.
The bottom line? While trade and tariffs are important for the global economy, history shows that their effects on financial markets are often overstated. Investors should continue to focus on their long-run financial goals and not overreact to short-term headlines.
Pursuit Planning and Investment, LLC is a fee-only fiduciary financial planning firm in Portland, Oregon. We offer virtual financial planning services. Feel free to review our services and place a commitment-free 30-minute discovery meeting on the calendar.
Have something on your mind?
Pursuit Planning and Investments, LLC (“PPI”) is a registered investment advisor offering advisory services in the States of Oregon, Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past results do not guarantee future results. Please contact us at 971-803-5948 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PPI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.planyourpursuit.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pursuit Planning and Investments, LLC (referred to as “PPI”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute PPI’s judgement as of the date of this communication and are subject to change without notice. PPI does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall PPI be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PPI or a PPI authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
Comentarios