On July 5 the Trump administration placed tariffs on $34 billion of Chinese imports . Then on July 10 it placed an additional $200 billion of tariffs on Chinese goods, from clothes to refrigerators.
How large tariffs could affect the market
Here are a few topics to help put things in perspective. For more details on how the tariffs could work, see the Associated Press Q&A on the topic.
- What history says — Large tariffs have led to market declines. The pattern reaches back almost a hundred years:
- In 1929 Congress passed the Smoot-Hawley Tariff. The Dow fell from 381 in September of 1929 to 41 in July 1932, a dramatic drop which precipitated the Great Depression. By 1934, global trade had decreased by more than 60%. As a result, economic nationalism grew, leading to World War II.
- Almost 70 years later, in 2002 George W. Bush imposed steel and lumber tariffs, as well as crop subsidies. In the first year of these tariffs, the S&P 500 lost more than $2 trillion in market capitalization.
- In 2003, after realizing that European retaliatory tariffs would hurt the U.S. and bring a market decline of several thousand points, the tariffs were lifted and the stock market recovered.
- No one wins a trade war — Although Trump says that America will win a trade war, that’s just wrong. Most economists agree that everyone will lose. America has thrived as a trading country.
The U.S. has a competitive advantage producing many things and likes to buy other things at low cost from overseas. Trade disputes will reduce sales of exports and increase the cost of goods usually bought as cheap imports. The result will be a slowdown in economic growth. - Exports matter to the economy — About 11.89 percent of GDP was exports in 2016, according to the research company statista. Our major exports according to the S. Commerce Department are:
- Travel and transportation services — $236 billion.
- Food products like soybeans, meat and poultry — $133 billion.
- Crude oil and petroleum products (a fast-growing area) — $109 billion.
- Civilian aircraft and aircraft engines — $99 billion.
- Auto parts, engines and car tires — $86 billion.
- Finance and insurance — $76 billion.
- Industrial machines — $57 billion.
- Passenger cars — $53 billion.
- Pharmaceuticals — $51 billion.
- Sales of intellectual property like software, movies, television shows, music — $49 billion.
- Generally, tariffs aren’t that high — According to data from the World Trade Organization (WTO), when you look at tariffs in relation to the size of world economies here’s what we see:
- America’s tariffs averaged 2.4% on a trade-weighted basis,
- Japan’s were slightly lower at 2.1%,
- Canada at 3.1%
- The European Union at 3.0%
- Mexico and China’s tariffs can exceed 4%.
What happens in a trade war?
First, let’s hope that everybody looks at some data and doesn’t do anything really crazy.
Since I know that’s not always possible, let’s think about what happens if we get a full-blown trade war. It’s hard to be sure what exactly would happen, but it’s very likely that:
- The supply of goods would tighten and spark inflation.
- Higher costs for labor, goods and higher borrowing costs from rising interest rates would reduce growth rates.
- If Gross Domestic Product falls in value over two consecutive quarters, we have a recession. According to the National Bureau of Economic Research we have had 14 recessions since the 1929 stock market crash. They lasted an average of 13 1/2 months. The mean length of a recession was 9 months.
- It would not be surprising to see stocks prices fall by as much as 40 percent for some period of time. In fact, as the chart below shows, the average annual market decline since 1980 has been 13.8 percent. The markets have finished up for the year 29 of the 38 years since 1980 and the average annual return of the S&P 500 was 8.8 percent each year.
What you can do to protect yourself in a trade war
- Be smart about what your money is for. If you need money for bills or predictable expenses over the next 36 months, keep it in a savings account at the bank.
- Be sure you know your budget. It’s prudent to keep 6 months to 12 months of basic family living expenses in an emergency fund at all times. But you can’t do this if you don’t really know where your money goes.
- Max out your retirement. Experts say that most workers should be saving about 20 percent of their gross income for retirement. If you are doing that, you are putting money into the market every month. If a recession comes, keep it up. By purchasing every month during the recession, you will get some great bargains and the shares will compound in the recovery and boost your returns.
If you want a more comprehensive game plan to protect your financial goals from a trade war, consider working with a CERTIFIED FINANCIAL PLANNER™ professional. You can expect a comprehensive approach to your financial goals that includes budgets, risk protection, retirement planning, investment management, taxes and estate planning.
And if the CFP® professional is ALWAYS an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – you can be confident that the financial advice you get is focused on your best interests and is a good fit for your complete situation.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will get a meaningful understanding of your goal progress. And you will get a personalized action plan for how to move forward.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you wanting to build a trade war game plan for your family, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their financial plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.