Are Tariffs A Phantom Menace?

Alot of headlines have been generated about tariffs and the threats of tariffs by the United States and the possible retaliation from other countries.

But so far, most economists and analysts think these policies have affected only a small percentage of industries and companies within the global economy. That could change, but experts hesitate to make predictions because the circumstances of world trade seem to change by the week, sometimes by the day.

Still, the Trump administration’s threats create an uncertain environment for companies, business owners and investors, says Andrew Rothman, investment strategist at Matthews Asia, an independent, privately owned investment manager focusing on the Asia markets.

So far, the president has imposed a 25% tariff on steel and a 10% tariff on aluminum, even from allies like Canada, Mexico, the European Union and Japan, acts that have drawn strong rebukes from foreign governments. Some of these governments are threatening to respond in kind, threatening an all-out trade war.

Business groups representing auto makers, beverage companies, farm equipment manufacturers and food packagers say the tariffs will inflict financial pain on companies now employing millions of American workers. Manufacturers can’t anticipate what kind of impact these moves will have on their global supply chains. Milwaukee motorcycle maker Harley-Davidson has already announced plans to move some of its operations to foreign countries. Coca-Cola has also threatened to raise its prices if it faces higher costs for foreign aluminum.

“We’ve seen some pre-buying of steel by automotive companies and we will see more of that as the year goes on,” says Brian Sponheimer, research analyst for GAMCO Investors, formerly known as Gabelli Asset Management Co., based in Rye, N.Y.

Share prices for automobile companies such as General Motors, Ford and Fiat/Chrysler Automobiles, have dropped since early July.

The moves could augur double the pain for farmers: Agriculture machinery costs could likely go up amid a trade war, and meanwhile the farmers would find themselves unable to sell soybeans and other products overseas because of retaliatory levies. “This will impact farmers in 2019,” Sponheimer says, adding that, overall, “large-cap companies based in the United States that are multinational will be hurt, but small and midsize cap companies that are based in the United States and have United States customers will be the winners.”

“In the short run, tariffs will have an inflationary impact on targeted industries,” says Doug Fry, senior portfolio manager and partner at Reinhart Partners Inc., an employee-owned investment manager based in Mequon, Wis. “In the long run, we do not know the bottom line. The price of cars is going to go up. And if German and Japanese auto makers can buy steel cheaper elsewhere than they can from the United States, they will do it.”