In the world of free trade, few words bring more fear than the threat of tariffs. So, when President Trump announced last week that his administration will impose tariffs in steel and aluminum products the markets reacted in disgust.
To begin with, the US has ran a perennial trade deficit with most of the world, from oil to electronics, consumer products, cars, basic materials, luxury goods and more. Why? Because it can!
Most of the world is very happy selling stuff to the US and taking its dollars as a form of payment. After all, the US dollar is a reserve currency, so you can store it, keep it or use to purchase other things you need. Despite this continuous deficit no one is really worried about it, neither the United States nor the countries who sell to it.
However, from time to time a US administration comes along that wants to correct what they perceive are gross imbalances. Without going too far back in history, when President Ronald Reagan started his mandate similar things happened. At that time the big deficit was with Japan and the rise of Toyota and Honda as world class car manufacturers.
Reagan threatened with tariffs, everybody got worried but at the end of the day Japan car manufacturers agreed to build car plants in the US. In exchange for that Japan opened the financial services industries to American companies.
We had very similar examples with the Clinton and Bush administration, all of them coming to good terms between the parties involved. The Obama administration was more globalist in nature and there was less trade friction.
Like what we saw with China early in 2017, President Trump has played his cards by threatening China with sanctions but after meeting with Xi Jinping the issue subsided. Some agreements have already been reached regarding the entry of financial services companies into China. Sound familiar?
If you sell on credit (i.e. trade deficit) to your largest client, if they always pay promptly and on time and always want more, wouldn’t you consider a discount if they asked (ie. the threat of tariffs). If you are a good business person, you know the answer.
Have a great week and buy in the dips.
Winston Capital Advisors is a firm that advises international advisors on capital markets and wealth planning. A former director at Morgan Stanley, Onetti has over 30 years of experience in international wealth management.