Recently, the subject of trade tariffs has been under major news network scrutiny. However, the concept of trade tariffs is not a new or recently implemented concept for any country. Back on December 16th, 1773, the Boston Tea Party protested the British Parliament’s Tea Tax by throwing 342 chests of tea into the Boston Harbor. This three hour protest was led by the Sons of Liberty, who threw 90,000 lbs. or roughly $1,000,000, worth of tea into the Boston Harbor. For a brief history lesson on other tariffs spanning hundreds of years please click here to read a good article from Smithsonian.
Looking at American tariff policy over time, we can see there has been experimentation with both high and low tariffs. Current U.S. import tariffs average about 3.5% on a portion of manufactured import goods, a steep drop from the 50% tariffs enacted during the Great Depression. However, over the past several decades, low tariffs and freer global trade has certainly been the leading policy. Supply chains have been designed for low-cost production and have created various manufacturing assembly points spanning the globe.
As supply chains and industries have moved to optimize efficiency, there have certainly been shifts in industry specific dominance, creating winners and losers alike. The U.S. is no longer a leader in manufacturing fabrics, TVs, toasters, dishes, or clothes (to name a few items). While these goods certainly are a necessity to daily life, simply manufacturing basic necessities is unlikely to lead a nation to economic superpower status, at least not in today’s world. By freeing up our economic capacity, i.e. removing those low-end manufacturing goods, it has allowed the U.S. to invest in semiconductors, technology, defense, health-care, A.I., 3D printing, e-commerce, and aerospace, along with many other goods and services.
So why are we talking about tariffs now? If history shows low/zero tariffs are a good thing, why implement them? There are two prevailing ways to think about this. It may be political, designed to ‘protect’ our domestic industries of steel and manufacturing. Alternatively, it may be an attempt to level the playing field against unfair trade practices of other nations. I’m going to leave the political argument alone for obvious reasons. Instead, I will focus on some numbers related to trade tariffs with several of our largest trading partners.
The chart to the right illustrates an average tariff rate applied by the U.S. compared to that of other countries. The ‘reciprocity line’ represents tariff equilibrium. We can see that the European Union, whom we share a common NATO alliance, has only slightly higher tariffs on U.S. goods than we charge on theirs. Not surprisingly, Canada and Mexico are both virtually on par because of NAFTA. China, however, has an average of a 7% higher tariff on U.S. goods comparatively. Looking at the chart, an important observation can be made: there isn’t a country depicted where the U.S. levies a higher tariff on their goods compared to our goods. Based on this information, there does appear to be leeway in raising tariffs on imported goods from several nations where their tariffs are currently higher.
With that said, there is much to be determined related to the imposition of tariffs. This chess match can certainly continue, with countries issuing new or increased tariffs, matching those issued by the counter-party. If this plays out to its extreme, everyone loses, prices increase on all parties, and economies will likely slow in the short-term. As we wait to see a final outcome, we expect volatility to continue for both U.S. and International markets. Having a neutral equity position makes sense given the uncertainty.
There is still a possibility the negotiations result in lower trade barriers. If successful negotiations take place and tariffs are lowered, then this global growth trend is likely to continue. If tariffs are implemented, one important fact remains: in the long-run, a highly diverse and innovative economy will drive success for its citizens. Fortunately, the U.S. remains at the forefront of disruptive industries, technological advances, and has a very diverse economy. Regardless of tariffs, my long-term positive outlook remains intact.
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