Key Points

  • Markets erupted in a “tariffs tantrum” last week with the Trump administration’s ramped up protectionism aimed at China.

  • Tariffs have not historically been successful at erasing trade deficits or stemming the secular decline of industries; and have come at a cost.

  • The stock market can probably handle ongoing trade spats; but if actual trade war risks begin to rise, we would likely see more tantrums.

Last week the United States Trade Representative (USTR) announced the Trump administration’s decision on trade measures against China under Section 301 of the Trade Act of 1974. They incorporated punitive 25% tariffs on up to $60 billion of annual imports, and included the aerospace, information/communication technology, and machinery sectors; with possible future additions including medical equipment, rail, maritime, BioPharma, and industrial robotics. The full list of tariff rates is expected within 15 days, followed by a 30-day comment period from U.S. stakeholders; the USTR will also bring a World Trade Organization (WTO) dispute settlement case on China’s technology licensing practices.

The reaction (so far) from China was swift—but somewhat benign relative to worst-case assumptions. They put forth a preliminary list targeting 128 U.S. products, accounting for about $3 billion of U.S. imports; including a 15% tariff on steel pipes, fresh fruit and wine, and a 25% tariff on pork and recycled aluminum. But it’s expected China may levy tariffs on more U.S. products such as consumer electronics, aircrafts, agriculture (e.g., soybeans), capital goods, and software/services.

As noted by Eurasia Group: “Overall, the approach announced…is far from maximalist (i.e., doing it all at once). Instead, the administration’s approach appears to be a rolling process to balance multiple goals: avoiding a major impact on global markets, consulting a wide range of stakeholders, and ultimately allowing room for a negotiated solution.”