Tariffs Could Turn Target Toward U.S. Goods

This date will be seen on the market commentaries main page Mar 07, 2018

Wasif Latif


By Wasif Latif, Head of Global Multi-Assets


We may have seen the first casualty of a brewing trade war — the top White House economic advisor, Gary Cohn, said he’ll be quitting the post. Cohn fought hard against the tariffs on industrial metal imports that President Trump announced last week.


Cohn’s key reason for opposing the tariffs — 25% on steel and 10% on aluminum — is the same bedrock reason that many others cite: The U.S. economy could be at risk if other nations respond with tariffs or other protectionist measures of their own. Other large economies, including the European Union and China, are promising to retaliate against U.S. products — the EU’s tariff list includes U.S. motorcycles, blue jeans, orange juice, cranberries and peanut butter.



History tells us that trade wars tend to hurt all parties involved. That’s because punitive barriers to the global exchange of goods often create higher consumer prices, lower consumer demand and slower economic growth.


Corporations are benefiting from synchronized GDP growth across key developed and emerging markets — sales and earnings expectations for 2018 are up significantly from just a few months ago. This positive trend could be in jeopardy if trade tensions continue to escalate, and this could lead to more volatility in stock, bond and commodity markets.


The White House called out China by name in rationalizing the tariffs on industrial metals, even though China accounts for only 2% of U.S. steel imports and 6% of aluminum imports.


The bigger issue among trade hawks appears to be the overall U.S. trade deficit with China, which is huge and getting huger. But an across-the-board tariff on metals doesn’t seem to us the most effective economic tool because of the collateral damage — it stands to hurt other countries more than it would hurt China.


In our view, an all-out trade war is unlikely — for each trading nation, the inherent risks of going down that path are too great. But we don’t need that extreme scenario to trip up the economy — even targeted tariffs could be painful.


The United States is the world’s largest importing nation — that’s been the prime focus of those who support the tariffs. We also need to keep in mind that the U.S. is also the world’s second-largest exporting nation, so there are a lot of potential targets.


From a portfolio perspective, our asset allocation portfolios are currently underweight U.S. equities, as we see more attractive valuations and better earnings growth in non-U.S. markets, which we believe are earlier in the economic cycle. Any slowing in U.S. economic growth could make international developed and emerging market equities even more appealing.


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This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.


Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.


Asset allocation does not protect against a loss or guarantee that an investor’s goal will be met.


Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S.  Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.


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