Don't fear the tariff.
When the S&P 500 (^GSPC) slipped 0.4% on Thursday, media were quick to blame a widely circulated report suggesting President Trump could announce tariffs on another $200 billion in Chinese goods next week. Setting aside the perils of tying one day's market volatility to any one development, we found it quite perplexing that this would be much of a story.
The White House first proposed these tariffs on July 10, launching a two-month public comment period. The Federal Register outlined the schedule a week later, setting due dates for written comments and post-hearing rebuttals on August 17 and 30, respectively. We have known for months that the investigation ends next week, making it the administration's first opportunity to announce its decision. And nothing in President Trump's rhetoric during the past two months suggests he would give China a reprieve. Instead of hanging on every twist and turn of potential new tariffs, we think investors are better off considering how the reality of all recent trade news squares with expectations.
Fisher Investments' Research department has kept a running tally of all tariffs enacted or under official investigation this year. At present, the U.S. has adopted new tariffs on $101.1 billion worth of goods and begun investigating levies on $392 billion more - the aforementioned $200 billion in Chinese goods and additional tariffs on auto imports, which amounted to $192 billion last year.
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China has thus far retaliated with tariffs on $48 billion in U.S. goods and threatened to tax $60 billion more, while the EU, Mexico and Canada have retaliated to the steel and aluminum tariffs by taxing a combined $19.3 billion. The tariff payments on all measures in effect thus far amount to $39.88 billion, presuming firms pay the tariffs instead of avoiding them by substituting or altering shipping patterns. This totals 0.046% of global GDP, which is far too small to cause a global recession.
If the threatened tariffs also took effect, maximum payments would rise to $103.4 billion, or 0.16% of world GDP - too small to materially damage the $87.5 trillion global economy.
Markets move most on the gap between reality and expectations or, in other words, on surprises. They also discount widely known information. Next week's potential new tariffs have been known for months and discussed worldwide, and we think they are priced in, not a whopping surprise. The bigger surprise, to us, would be trade ending up freer than those fearing tariffs seemingly anticipate.
Therefore, we think the more significant developments occurred on the diplomatic front.
The most high-profile example: the U.S. agreement with Mexico on a replacement for NAFTA, which Canada is now in talks to join. Should the effort prove successful, Trump, Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau could sign a new deal by December 1, the day Peña Nieto leaves office. Though the pending deal would not remove the steel and aluminum tariffs or retaliatory measures, it would remove barriers in energy and digital services markets, making trade among North American nations incrementally freer than where it started this year. This is a positive few saw coming when NAFTA talks kicked off.
Meanwhile, the EU's trade commissioner, Cecilia Malmström, announced this week the EU is ready to remove tariffs on automobiles and other industrial goods if the U.S. does the same, which would negate Trump's threatened auto tariffs while making trade between the U.S. and EU freer overall. That's another development few thought possible months ago.
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Even when Trump and EU Commission President Jean-Claude Juncker agreed to explore reducing tariffs in late July, most presumed the deal would implode. It still could, perhaps, and Trump downplayed the EU's offer on Friday, though it is worth remembering that walking away from negotiations is one of the many tricks outlined in The Art of the Deal.
Investors who are hung up on tariffs miss a key point: New tariffs aren't automatically permanent.
As Fisher Investments founder Ken Fisher wrote earlier this year, President Trump appears to be using tariffs for political purposes. In effect, tools to get other world leaders to the negotiating table. Although we don't believe any tariff is good, these do appear to have served their purpose. Before the threatened auto tariffs, trade talks with the EU were dying. Now, they are moving right along. Chinese tariffs were ostensibly a ploy to get China to improve intellectual property protections. While that effort remains ongoing and trade talks with China are moving more slowly, there may have been other political aims at work, like nudging China to cooperate with North Korean denuclearization. Once progress on the political front is sufficient, these tariffs could easily go the way of the threatened auto tariffs.
If trade ends up freer instead of more protected, we believe it would be quite a positive surprise for markets. Even if this doesn't happen, we don't think new tariffs are reason to be bearish on stocks. Rather, they help keep expectations lower and the bull market's proverbial "wall of worry" intact, giving stocks plenty of room to climb as reality beats diminished global growth expectations.
By: Aaron Anderson, Senior Vice President and Head of Research at Fisher Investments.