Market Minute - June 18, 2019
There has been a lot written on tariffs over the past few months as news regarding the trade war with China continues to develop. On another trade front, President Trump threatened to impose 5% tariffs on Mexico but later dropped those plans as a deal was reached regarding immigration. Trade should remain in the news as President Trump and Chinese President Xi are likely to meet at the G-20 summit in Japan later this month.
Let’s take a quick look at tariffs and the potential impacts to the financial markets. A tariff is a tax on imports which is paid to the government by the importing company. Governments can place tariffs on goods for a variety of reasons. They can use them to restrict imports from a country by raising their prices, protect domestic industries, or impose them due to political reasons. The question is, do those higher costs get passed to the consumer? Economist’s would say that depends. Companies have a few ways of dealing with tariffs. They can absorb the higher prices and take the hit to their profit margins or pass the costs to the consumer. Clearly, both have a negative economic impact. Corporations can cut costs internally to offset the higher prices from tariffs or source materials from another country that is not subject to tariffs. After years of globalization and integrating supply chains, moving production from one country to another will take time and there are associated costs of making such moves. Companies will likely elect some combination of options if tensions continue. Those more susceptible to tariffs have certainly been reviewing their choices.
Financial markets are strongly impacted by increased uncertainty, which leads to volatility as the markets react to news regarding trade. Another area of impact is on business sentiment. Companies can have a hard time making investment plans given the trade policy uncertainty leading to decreased investment. These impacts can ripple through the economy.
The use of tariffs for political and economic strategy has been around a long while and it won’t be going away soon. During times of heightened uncertainty, understanding the impact while maintaining a balanced portfolio can help you stay focused on your long-term goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Where applicable, all data and information has been gathered from sources believed to be accurate such as the internet, nonaffiliated 3rd parties, news articles and professional subscriptions but this information is not warranted to be correct, complete or true. All investments carry risk including the loss of principal.