U.S.-China Trade Conflict: How to Protect Your Portfolio
May 28, 2019
By Mike Moreland
Vice President - Investments
The U.S. has historically been a net importer of goods and services — we buy more from the rest of the world than it does from us. This is not an unexpected position from the world’s largest and most vibrant economy, one that has historically promoted the benefits of free trade. At the same time, import activity is a takeaway from GDP. Goods and services produced elsewhere, by definition, do not directly add to employment or the national wealth of our nation.
In an ideal world, trade policies are free and fair. We may still import more than we send elsewhere, but the playing field is level. In reality, it’s not. And that’s what brings us to the current state of affairs. The U.S. imposes relatively low tariffs on incoming goods, while many other nations have higher tariffs to better protect domestic producers.
And then there’s China. In addition to its restrictions on imports, it is widely accepted that doing business in China carries an assumption that patent and other trade protections are nonexistent. And, as in the recent issues with Huawei Technologies, there are allegations that China uses its exports to engage in industrial and other espionage activities.
The Trump administration took office with the intent of addressing these concerns. Negotiations with most developed nations proceeded relatively smoothly. Those with China, as we see in the headlines, not so much. Michael List, Portfolio Manager for the Wealth Management Division, is closely following the escalation of the trade battle with China.
Which industries are affected by Chinese tariffs?
In the bigger picture, what imports are affected by current and proposed tariffs? The chart below shows that up to this point, most products entering the U.S. are not taxed at the point of arrival. The impact of tariffs on the remainder are notable, but have not been sufficient to derail U.S. spending or boost inflation from higher end-user prices.
That was then, this is now. The Trump administration recently threatened to raise tariffs up to 25 percent and expand their imposition on a wide range of products not currently subject to import taxes. What are these? The chart below, courtesy of Bloomberg LP, provides an idea.
While this escalation can be seen as the next phase of the administration’s negotiation tactics, rhetoric on both sides is becoming more heated and the risks to all parties are increasing. Goldman Sachs estimates that an across-the-board 25% tariff on Chinese imports will raise U.S. inflation by over 0.5%. The accompanying drag on U.S. spending (through higher costs to consumers) may reduce U.S. GDP by 0.6% over a multi-year period, and China’s by nearly 1.0%.
These are serious numbers, sufficient to undercut a favorable environment for global financial markets. And, certainly, the potential for higher inflation is in the back of the Federal Reserve’s collective conscience as it weighs the prospect of higher inflation as the year progresses.
Tariff protection for your portfolio:
We still expect a face-saving resolution for both the U.S. and China, but its timing is increasingly uncertain. Markets will remain attuned to the ‘news of the day’ as events unfold. Volatility will likely remain high, reinforcing the need to maintain a conservatively structured, broadly diversified portfolio. We are optimistic of the outcome, but we always ask, “What if we’re wrong?”
At Security National Wealth Management, we manage in a manner that allows participation in the good times, and helps preserve value in less favorable environments. Should you have any questions, please contact your advisor for more insight.