Following the 2024 presidential election many people turned to the internet to understand what a tariff is, as President-elect Donald Trump made their implementation one of his key agenda items. Simply put, tariffs are taxes levied on imported goods and while many people were learning about them for the first time, they have been a cornerstone of economic policy for centuries. As investors, we must consider the benefits and consequences of using them and the impact they might have on the markets.
Economic Impact
Like many governmental policies, the impact tariffs have on an economy can be mixed. In general, the reasons to employ tariffs include:
- Protection of domestic industries/jobs
- Revenue generation
- Trade negotiations
Tariffs also come with costs and are considered to be detrimental by many economists because they can result in:
- Higher consumer costs
- Retaliation by other countries
- Market and capital allocation inefficiency
U.S. Tariff History
Tariffs have a long history within the U.S., most memorably with the Tariff of 1828 and the Smoot-Hawley Tariff Act of 1930. Both were broad sweeping, and the latter is believed by many to have exacerbated the Great Depression, helping cause the stock market to lose 89.2% of its value from 1929-1932. Importantly, when Smoot-Hawley was enacted in 1930, the economy was already on shaky footing following the Roaring Twenties when there was rampant speculation, including buying stocks on margin. That period led to financial ruin for many individuals and banks, ultimately ushering in the enactment of the Banking Act of 1933 (or Glass-Steagall Act), which among other things established the Federal Deposit Insurance Corporation, or FDIC.
More benign periods of tariff implementation include those by Presidents George W. Bush and Barack Obama, which targeted specific industries like steel. During President Donald Trump’s first term a broader set of tariffs was instituted, which included steel and aluminum, many of which were aimed at China.
Today
As of this writing, President Trump’s second term has seen a flurry of tariff announcements including a 10% tariff on all Chinese imports, a 25% tariff on both Canada and Mexico that are currently paused, and a 25% tariff on steel and aluminum imports. It’s important to understand that the tariff war is very fluid as he has indicated that he will slap reciprocal duties on other nations and retaliate against future tariffs imposed on the U.S. He has also identified more industries to levy specific tariffs on, like autos and semiconductors.
The increase in rhetoric makes it more likely than not that we are about to embark on a global trade war, though the magnitude and duration remain unknown at this point. Economically speaking, higher import prices will probably lead to inflation while reductions in global trade will likely lower economic growth. When these happen at the same time it’s termed ‘stagflation”, which can be troublesome for risk assets if they become protracted.
Looking Forward
We are still in the early innings in this new global trade war and as a result, the eventual impact will not be known for some time. As investors, we have to make decisions before we know the final score, which is one of the biggest challenges. To help us, we tend to use history as a guide. As Mark Twain once said, “history doesn’t repeat itself, but it often rhymes” and fortunately we only have to look back to President Trump’s first term for evidence of what the future may look like. At that time, President Trump used tariffs primarily as a negotiating tool and they were removed rather quickly, allowing risk markets to recover. During that period, we saw the S&P fall 4.38% in 2018 before climbing a robust 31.49% in 2019 when the Phase One trade deal between the United States and China was announced in October.
Coming into this tariff war, it’s important to acknowledge that the U.S. economy is in relatively good shape, benefitting from low unemployment, resilient consumer spending, and a strong U.S. dollar. From that perspective, we might deduce that the U.S. economy can withstand the impact but it does not mean that it will be immune. Since markets are forward looking, it will be important for investors to remain vigilant regarding changes in policy and sentiment and incorporate new information into their decisions.
At Maple Capital, we believe the best way to invest is to take a long term approach, diversify your portfolio, and own quality businesses that can deliver through-cycle. Should you have any questions, please reach out to your Portfolio Management Team.
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Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.
This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments. Past performance is not indicative of future results
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