Tariffs is a hot topic at the moment and may remain so for some time. The big question is what will the effects of tariffs be…inflation, retaliation, volatility, job losses, disinflation, etc. What we have seen so far is an increase in international tensions, increased nationalism (especially in Canada), plenty of rhetoric, some retaliation and most of all a great deal of behind the scenes re-negotiation.
We can be sure that tariffs will have side effects some intended and some un-intended. A tariff is, in the simplest of terms, a tax imposed by a government on imports which increases the cost of an item(s) to the end consumer.
HOWEVER, NOTHING IN LIFE IS AS SIMPLE AS THAT SO LET’S LOOK A LITTLE DEEPER
US TRADE DEFICITS
LET’S JUST LOOK AT INFLATION
The obvious way of looking at this is that the imposition of a tariff will put up the cost of things. If goods cost ‘X’ and then suddenly they cost ‘X+20%’ then someone has to suffer the extra 20% price increase! It all seems pretty logical that tariffs will cause inflation, prices will rise for consumers. So, it does seem to be something very negative. The trouble is these outcomes are very rarely binary and there are always remedies and unintended and unanticipated effects.
So, what if?
WHAT IF PRICES RISE?
If prices go up and there is no corresponding increase in wages there cannot be any ‘consumer inflation’ in fact it is much more likely deflation or economic contraction. We all have a certain amount of money to spend, for the vast majority of people this is finite and there is little flexibility to change that. If prices rise, most people have to cut what they spend in at least one area. The impact of this is to slow the economy as liquidity is reduced or diverted. The economy hinges on the free flow of money, oversupply can cause it to overheat and over-restriction – well the opposite!
US GOVERNMENT SPENDING
In the face of the actions of the US Department of Government Efficiency it seems inappropriate to consider tariffs triggering more US government spending but the increase in US government revenues through tariffs gives the US administration the option to push that revenue into the economy. This could help the US consumer by cushioning the impact of higher prices but most likely this would give rise to inflation especially if the net effect is to increase the flow of money. Another option is to pay down debt, the longer term effect of this is a natural positive. Less debt, less interest more money to spend next year or less tax to collect giving the consumer more spending power.
SUPPLY OF GOODS
If the market has been set up to supply goods to a growing economy and due to the increase in the price of goods the supply of goods is then greater than the demand, then prices may have to fall so that the surplus goods aren’t simply wasted.
CHINA & US TRADE GAP (FIVE YEARS)
WHO TAKES THE HIT?
It is possible that the increase isn’t passed on to the consumer (unlikely but possible). A 20% tariff could be absorbed by the wholesaler/importer/manufacturer where there is sufficient margin. If each was to cut their share of the profit – the full tariff may not be passed on to the consumer. However, many US industries export goods and then re-import them so there must be an impact on US companies and there will be an impact on the consumer.
SLOWING THE CONSUMPTION OF IMPORTED GOODS
The US has a substantial trade deficit with most countries around the world (I have not checked to see if it is all countries, but it is a long list!) so from a US perspective there is a need to re-negotiate and reduce imports vs exports otherwise the debt burden will just continue to increase – and it is already substantial.
The supply chain is very complicated as illustrated below.
CAR INDUSTRY SUPPLY CHAINS CROSS BORDERS (CAR PISTON MANUFACTURING)
NIKE – SUMMARY
Nike has 35 U.S. factories (30 focused on apparel), which makes up 6.4% of their total number of worldwide factories.
INCREASING MANUFACTURING IN THE US
Bringing jobs back to the US is clearly beneficial for the US economy as well as their deficit (why make cars in Europe to export to the US when they can be made in the US to sell in the US)?
By bringing manufacturing closer to home, companies can address vulnerabilities exposed by recent global disruption while modernising operations, adopting more sustainable practices and leveraging better technologies to improve efficiency.
POTENTIAL IMPACT OF RECIPROCAL TARIFFS ON THE US
What we haven’t taken into account is the potential dent to the income earned by US companies as countries impose their own tariffs on US goods and services.
Here is some info.
- Apple sold 43 million iPhones in China in 2024
- McDonald’s operates 6,820 restaurants in China
- Walmart runs 364 stores on the mainland
- Collectively, the S&P 500 earns 7% of its revenues from China
S&P 500 REVENUE FROM CHINA IS ROUGHLY FOUR TIMES THE US TRADE DEFICIT WITH CHINA (US TRADE DEFICIT WITH CHINA VS US CORPORATE EXPOSURE TO CHINA)
IS THERE AN OPPORTUNITY?
VOLATILITY
History shows that periods of extreme market volatility often pave the way for strong recoveries. Take the VIX, a real-time market index that measures the market’s expectations for volatility over the next 30 days while assessing historical movements. It’s often referred to as the ‘fear gauge’ or ‘fear index’ because it tends to spike during periods of market turmoil. Over the past 30 years, the VIX closed above 50 on nine occasions.
Perhaps each market crisis really does present us with a substantial opportunity.
AROUND THE WORLD
I have been watching share prices in the UK and can see that some real gains have been made of late. Investment capital has been leaving these shores for many years. Maybe tariffs are causing fund managers now to question ‘American Exceptionalism’ and look for value in other markets. The UK and Europe seem cheap relative to the US but the US tech stocks have been so dominant for so long they are hard to ignore as is the opportunity in the US, which remains the world’s largest investment opportunity.
Please contact NBL if you need to speak to us at any time.
