Originally published May 14, 2019.
Foreign trade can be a win-win for everyone involved, and it often is.
Tariffs can be a lose-lose for for everyone involved, and they often are.
A major factor explaining our trade deficit with China is consumer demand. We Americans enjoy buying things at low prices, even if they are made abroad. While many of us are proud patriots, buying American made is not a priority of ours. Like James W. Frick once said “Don’t tell me what your priorities are, show me where you spend your money and I’ll tell you what they are”.
There can be winners and losers on trades, like when the Cubs traded the Cardinals Lou Brock for Ernie Broglio and Bobby Shantz (who? Exactly), but trade deficits are not necessarily a bad thing. We engage in trade everyday and the dollars we spend for goods create an imbalance between us and our trade partner.
For example, you sit on your couch and click a few buttons on your phone to send $30 to Amazon and two days later they send you 12 packages of your favorite sardines. You now have a $30 trade deficit with Amazon, but you get to enjoy your sardines. Did you lose? Possibly, because your breath will stink, but financially you were agreeable that the sardines were worth $30 of value to you.
In theory, we buy things from China because they are cheap and we send them dollars in return. China can reinvest those dollars here in America, or they can convert it back to their currency (Yuan). By converting hundreds of billions of dollars back to Yuan, it would raise the valuation of their currency, making Chinese goods more expensive for us and American goods less expensive (once again, in theory).
Who pays tariffs that we impose?
Consumers here in America will pay higher prices, and the Chinese economy will have a negative impact by exporting less goods. It’s a lose-lose. Tariffs are a tax on consumers. Right now, they are being used as a weapon to try and negotiate some type of new trade deal. We’ll have to wait and see the outcome.
How does this impact your portfolio?
The media will be in a frenzy for an extended period of time (like they ever aren’t in a frenzy), causing investors and markets to react wildly to any updates for a trade agreement or new tariffs going into place. I’d expect many days +/- one to two percentage points on the broad market.
What should you do?
Turn off the news. There is no investing edge to be had from watching the daily updates. Expectations are priced in nearly instantaneously, so in order for you to benefit from acting on the news you’d have to be a step ahead of the news or just simply guess correctly.
There are always a million reasons to bail on equities, but the real risk is not staying in equities, the real risk is getting out of equities. Real wealth is not built from money markets, CDs, and bonds. Should those be part of your assets? Of course, but your equity allocation is your long-term money and day-to-day movements in the markets should not dictate your behavior.
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