This past week, President Trump signed a proclamation that imposed tariffs on the steel and aluminum industries. While the full impact of these tariffs and the subsequent responses by other nations remain unclear, these actions have led to many investor concerns regarding the potential for an upcoming “trade war.”
A tariff is a tax or a duty to be paid on a particular class of imports or exports. This, in theory, makes foreign products more expensive and gives an advantage to domestic producers of a particular product. With the actions of this week, President Trump will impose a 10 percent tariff on imported aluminum in addition to a 25 percent tariff on imported steel. North American bookends to the United States, Canada and Mexico are exempt – for now – and other countries may also be granted immunity in the future.
In today’s fluid news cycle, it can be difficult for even the savviest of investors to drill down and attempt to navigate such policy decisions and how they can affect your investment holdings. Although certain outcomes seem almost inevitable as a result of this action, so many are still shrouded in mystery. Nearly a year ago, the President directed the Commerce Department to research whether or not imported steel was posing a threat to national security. Last month, the Commerce Department concluded that national security concerns justified such tariffs to be imposed.
So, what does all this mean, and how is it likely to affect your retirement finances and investments? It is widely expected that American steel and aluminum producers stand to benefit from the tariffs, as pricing will be a greater advantage than prior. However, now freed from the competition of other steel and aluminum producing giants like India, Japan, South Korea, the European Union, and the world’s largest steel producer of both raw materials, China, U.S. companies will likely raise their own prices in coming years. Overproduction by China has oversaturated the world market in regard to both metal products, which have driven prices down around the globe.
For American companies that depend on steel and aluminum, like General Electric (NYSE:GE), Anheuser-Busch (NYSE:BUD), Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Campbell’s Soup (NYSE:CPB), General Motors (NYSE: GM) and others, it will likely mean higher input prices for their products. The question for investors is whether these costs will be passed to consumers through higher prices or if the companies will accept lower margins to keep prices stable.
Many companies have discussed the potential for backlash, with the possibility of foreign retaliation in other areas that could potentially harm the U.S. economy. Foreign nations negatively affected by steel tariffs could impose their own tariffs on other products, and these “protectionist” actions could cause less trade which may have a negative impact on global economic growth. If tariffs do result in higher domestic steel and aluminum prices, there is a real possibility that companies who rely on those products will then pass the cost on down the supply chain, eventually landing in the lap of the consumer. One industry that could take a large hit is the automobile industry, as the American International Automobile Dealers Association said it was fearful that the tariffs would cause a substantial spike in car prices.
I think higher consumer good prices are inevitable. While higher costs of raw materials like steel and aluminum may take up to a year to work their way through the supply chain, we may not see much effect in the investment realm, in regard to the aforementioned corporations, until 2019 or 2020. If you’re a consumer, you might want to purchase that new dishwasher or automobile this year, and if you’re in the market, it might be a good time to buy since demand for automobiles may be artificially inflated and drive prices up.
The President’s actions have caused many questions for investors. Not only what the tariffs mean for pricing of aluminum and steel, but how reactions from other nations will affect the pricing of many different exported products. Wall Street has been on edge since the announcement, and the initial reaction was clearly negative, with the Dow Jones industrial average falling 1.7 percent upon the announcement, as well as the S&P 500 index and the NASDAQ composite dipping 1.3 percent. But investors were encouraged by the exemptions granted to neighboring Canada and Mexico, with the thought that other valued trading partners may be safeguarded from the tariff.
Many of the ramifications of trade tariffs, both the current actions and the responses from other nations, remain unclear. These issues certainly bear watching, but investing based upon political events that are widely unknown outcomes can be a difficult proposition. For investors, it is better to be certain regarding your individual investment or retirement plan, and ensuring that the risk being taken is appropriate to your long-term objectives, risk tolerance, and time horizon. Diversification should remain key in times like these. If any action need be taken, it may be that you sit down with a trusted financial service professional and readdress or recalibrate your investment objectives.