The latest Star Wars movie was a flop relative to expectations, but the epic drama of Global Trade Wars lives on.  Tariffs are terrible for you and me. If a tariff is placed on goods and services within a certain industry, companies will try to pass on the cost to the consumer by increasing prices. If unsuccessful, profit margins will be squeezed. A government’s attempt to be protectionist in the short term, ultimately becomes a tax and impedes consumer spending in the long run.

How Did We Get Here?

Attempting to forecast the outcome of this issue is tricky, but it is helpful to understand the 2018 timeline of how we got here:

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  • March 1st – President Trump announces tariffs on steel and aluminum imported into the US. One week later, Trump signs these tariffs into effect, but significantly muted his initial comments as Mexico and Canada are excluded. By the end of March, the EU, Argentina, Australia, Brazil and South Korea were exempt as well.

  • On March 22nd, Trump announces $60 billion of tariffs on certain Chinese imports.

  • April 2nd – China retaliates with $3 billion of tariffs on American goods. The next day the Trump Administration releases the list of 1300 Chinese goods to get slapped with tariffs. China then upped the ante with a list of 106 US products, totaling $50 billion, to be taxed.

  • May 19th – A joint statement is released between the US and China that China will buy more goods and services from the US.

  • May 20th – Secretary Treasurer Mnuchin says the “Trade Dispute” with China has been tabled.

  • May 21st – President Trump tweets the Chinese will buy additional farming goods and equipment from the US. China will close the US trade gap, but no dollar amount was specified.

  • May 31st – US Secretary of Commerce Wilbur Ross announces US will impose tariffs on certain steel and aluminum from Canada, Mexico, and the EU based on national security concerns.

  • June 6th – Mexico, Canada and the EU retaliate with $3 billion of tariffs each on various US exports.

  • June 14th – Trump administration announces $50 billion of Chinese goods will be taxed starting July 6th. China vows to retaliate in the “same scale and the same strength.”

  • July 1st - Canada imposes $12.8 billion of tariffs on US goods, mainly steel and aluminum.

  • July 6th – US slaps tariffs on $34 billion of Chinese imports.

  • July 10th – US reveals a list of $200bil of Chinese goods that potentially could get taxed in August.

What is the Point of Going Down this Path?

    The Trump administration is looking to fulfill some goals by imposing these tariffs:

  1. As a followup to lowering the corporate tax rate to 21%, Trump is claiming to defend corporate America and attempting to make it more competitive on a global basis.

  2. Trump is also fulfilling a campaign promise to the rust belt that helped him win crucial electoral votes.

  3. Trump’s biggest beef is with China and is its ability and willingness to allow patent infringement on US intellectual property. If patents are not protected and upheld, the driver of innovation will be destroyed.

  4. Trump wants to close the trade gap with China from $376 billion to $200 billion.

  5. By issuing tariffs on its allies, the Trump administration is sending a message to China that it is not only going after them and hopes this furthers trade negotiations with the second largest economy in the world.

How do you prepare your portfolio?

The stock market reacts positively and negatively to each headline or tweet regarding tariffs, but you shouldn’t. Put the numbers in context: The approximate $60 billion of total tariffs imposed globally is only 0.33% of the $18 trillion global economy.

As of mid-July, we do see this coming to a resolution sooner, rather than escalating into a full-on, longer term battle. Clearly certain industries will be impacted. Putting the genie back in the bottle on trade relations between the US and other developed nations will not be easy. Remain diversified. The Consumer Staples sector, which has been one of the worst performing sector in the S&P 500 because of fears of rising interest rates, has sold off even further on the back of potential trade wars accelerating. Stocks within this sector look very attractive from a dividend yield and valuation standpoint if one is willing to look out more than 12 months.

Note: John J. Petrides, MBA, is a Managing Director and Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.

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