Trump’s trade war: Not tariff-ic.

Tariffs imposed on Mexico, Canada, and China 

It almost looked as if that guacamole dip and the tequila for those margaritas on Super Bowl Sunday were about to get more expensive for U.S. consumers after President Trump announced his intention to impose a 25% across-the-board tariff on Mexico beginning February 4. However, the day before the tariffs were to become effective, the implementation was delayed for a month after Mexico agreed to send 10,000 troops to the border to combat the flow of fentanyl into the U.S. A few hours later, Canada also gained a one-month reprieve from a planned 25% tariff (with an exception for energy, which faced a 10% duty). Meanwhile, China has been hit with a 10% tariff, but might be rescinded or altered pending negotiations. 

While investors, businesses, and consumers are breathing a collective sigh of relief, President Trump’s plans regarding future tariffs remain a great unknown. We may see more product-specific duties on semiconductors, steel, aluminum, pharmaceuticals, and other items by mid-February. Until now, markets had taken all the tariff talk pretty much in stride, perhaps on the assumption that Trump’s threats were more negotiating bluster than a serious policy. Even with the reprieve, investors face a new and uncomfortable reality.

Why? 

First, it is well known that Donald Trump for decades has been incensed over the U.S. trade deficit. As shown in Exhibit 1, the merchandise trade balance has been widening for the past three decades, well before the emergence of China as an exporting powerhouse after it joined the World Trade Organization (WTO) in December 2001. There are many reasons for this deterioration in the U.S. trade balance, including: 

• A heavily consumption-focused economy
• The impact of globalization and the hollowing out of U.S. manufacturing capabilities
• A national savings rate that is well below the rate of investment (requiring massive capital inflows that are the mirror image of the current account deficit)
• Disparities in tariff and non-tariff barriers that disadvantage U.S. exports, especially for agricultural commodities

Index definitions 

• The S&P 500 Index is a market-weighted index that tracks the performance of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market.
• The Cboe Volatility Index (VIX) measures the constant 30-day volatility of the U.S. stock market using real-time, mid-quote prices of S&P 500 Index call and put options. A call option gives the holder the right to buy a stock at a specified price; a put option gives the holder the right to sell a stock at a specified price.

Glossary 

• Gross domestic product (GDP) is the total monetary or market value of all the goods and services produced in a country during a certain period.
• Weighted mean is an average calculated by assigning different weights to some of the individual values. If all the weights are equal, then the weighted mean is the same as the arithmetic mean.
• Simple mean is the average value of a set of numbers.
• National savings rate refers to the percentage of a country’s gross domestic product (GDP) that is saved rather than spent.

Important information 

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.