- International investing is currently quite attractive.
- A global trade war benefits no one.
- High tariffs rarely achieve their aim (even if it’s a commendable one).
The global markets are valuable diversifiers that support longer-term stability in returns. Foreign markets also represent roughly half of the world’s market capitalization and about three-fourths of the world’s GDP, which is not the type of growth investors want to miss out on.
Currently, international investing happens to be especially attractive as international market valuations are trading at a significant discount relative to the U.S. market, given strong U.S. outperformance since the 2008 financial crisis. But, it’s important to remember that markets are cyclical in nature and performance leaders change frequently.
Recently, international markets (particularly emerging markets) have been viewed with some concern as President Donald Trump has advocated imposing tariffs on imports to help protect U.S. industries and create jobs — initial discussions have focused on a 35 percent tariff on all Mexican imports and 45 percent on all Chinese imports.
As discussed later, we don’t have to look too far back in history to find examples of similar trade policies that did not turn out well. Reviewing the past, as well as the potential impacts of such policies on the U.S. and other countries shows imposing tariffs could be detrimental to all countries involved, and particularly to U.S. consumers.
What Does It All Mean?
Steep import tariffs could directly impact U.S. consumers. For example, a consumer is interested in a Chinese-made pair of shoes which used to cost $100. After a 45 percent tariff is imposed, the price to the consumer goes up to $145. This could, in theory, encourage the consumer to purchase cheaper, U.S.-made shoes, thus boosting U.S. shoe manufacturing, creating more jobs, growing the U.S. economy, etc. But, there are three big problems with this seemingly simple story:
1) China will most likely retaliate by imposing tariffs on imports of U.S. products (hurting U.S. exporters), and a back-and-forth trade war could ensue.
2) Many U.S.-made products utilize components made in China (such as iPhones), thus increasing input costs for those companies.
3) Other countries that have struggled to compete on price with scale-efficient China and close-proximity Mexico will now get their chance to be major exporters to the U.S. In other words, problem not solved. There will need to be more tariffs on more countries, ultimately resulting in higher prices for all.
One might ask, can a president even impose such policies on his own? The simple answer is no. In order to impose large tariffs and/or alter trade agreements, Congressional approval is needed, making it a more difficult task.
While the President’s intentions to help the U.S. economy and American workers may be commendable, raising tariffs on major trade partners may not be the best way to go about it.
Who is Affected and How?
The brunt of the initial impact would be felt by Mexico, China, and the U.S. But, the United States and China are the world’s largest economies, so a trade war between the two could have a larger global ripple effect. The chart below illustrates how much the U.S. currently imports from each country.