Navigating the Tariff Trade

Make no mistake about it, there has been a lot of talk about tariffs this year—learning more about them will only make you a better trader. After all, it never hurts to understand the headlines driving the market.

Why?

Because trading off the wrong headline can cost you money.

For example, stocks came off all-time highs last week but fizzled after it appeared that we wouldn’t be close to reaching a trade deal with China.

So when the sell-off hit Monday, I stepped in to buy the market for a quick trade.

This was the view of my Total Alpha account midweek

But before I get ahead of myself, and explain how you can profit off the tariff news. It’s important that we go over the basics first, understand what tariffs are on what their impact on the global economy is.

Tariff 101

Chances are you haven’t heard the term tariff thrown around this much since you studied American History in high school.

Remember the Boston Tea Party? A little tariff imposed on America was one of the few triggers that started the American Revolution…3 pennies per pound.

Well, brace your yourself──── It’s the end of the decade and the future in front of us seems to hold new tariffs as well as a war of the trading variety.

A tariff is a government tax on imported goods. The result is the price of foreign goods gets higher.

The usual reasoning behind tariffs is that countries use them to either limit imported goods or to even out the pricing between foreign and domestic products. Sometimes both.

Why Is Tariffs News Now?

The U.S President made plans to hike tariffs billions of dollars’ worth of China’s imports, steel imports from Japan, Eastern Europe, and several other countries, as well as threatened tariffs on German autos. He delivered these under the authority granted to him under the heading of national security risks. This even extended to American dairy.

Chinese imports undercut two major industries in the U.S. The result is the U.S. margins are getting driven down constantly and the U.S. market is flooded with China’s goods. There’s also been an ongoing issue with intellectual property theft that’s been a headache for decades.

The belief behind the tariffs is two-fold. First, it evens the playing field for subsidized industries in other countries, including Chinese businesses. Second, it provides leverage for the administration to demand controls on intellectual property theft.

Deep In Bed With China

Last year the U.S. imported $540 billion worth of goods from China. A majority of what we imported were cellphones, computers, and what’s on your body and feet. In return, China imported only $120 billion of U.S. goods. Putting a spotlight on how far from a 2-way street we are. And this has been happening for years!

To top it off, China OWNS 28% of the U.S. debt it owes to foreign countries, making it one of the largest foreign investors in U.S. treasuries.

But wait, there’s more! As of this spring, China owned $1.1 trillion of the U.S. debt.  

  

The Tariff Effect

So, what do these tariffs mean for us, billions of dollars on Chinese goods?

Initially, it raised prices on most consumer goods. I expect retail prices to climb, causing sales to drop. Low wage growth makes exacerbates this dilemma.

But American companies can’t keep up with the low prices of Chinese products. Labor costs make China more competitive for resource-intensive goods. They are forced to choose between lower margins or finding cost offsets.

Yet we may not be able to handle the demand. U.S. steel production has declined over the last 50+ years. That reduced overall production capacity. It’s not a simple matter to turn on production that offsets the imports.

Brace Yourself

For years and a couple of presidents, Americans were told more jobs are coming. But with higher tariffs looming, many companies would rather cut costs at home than pass that cost on to the consumer. This means fewer jobs which adds fuel to speculation of a possible recession.

In the meantime, everyone is waiting to see if December tariffs get signed. There is a very real chance they won’t be, at least this year, mainly due to the impending election year on our heels. These tariffs could hurt our president’s reelection odds if things take a turn for the worst.

There is no deadline set for the trade deal, just that it will be completed when the president is good and ready.

China isn’t the only country in the cross-hairs of tariffs of the future. Brazil and Argentina are potential targets. Just this month our president tweeted “Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.

How to Navigate

Steel companies leveraged to U.S. production benefit from protectionist measures. Make sure you understand which ones manufacture in the U.S. versus outside. Those with greater global exposure are more unpredictable.

Chinese American Depository Receipt (ADR) trade directly with the hopes of a deal. Companies like Alibaba and JD.com move higher on lower tariffs. Lower tariffs increase U.S. consumption of Chinese goods. This leads to higher GDP outputs, which in turn drives growth in these Chinese companies.

It remains unclear if the U.S. economy will sustain long-term damage from the tariffs. So far, it’s shown solid growth in the face of global stagnation. For now, I focus only on news that states a deal is or is not done, and nothing in between.

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