On March 1, President Trump announced that he would impose a 25% tariff on steel and 10% on aluminum, following a Commerce Department report that warned that reliance on imported steel was undermining American security. The announcement set off a 420 point drop in the Dow Jones on Thursday.
There will be winners and losers in the real economy
The steel and aluminum tariffs President Trump has proposed would create both winners and losers. American steel and aluminum producers would, obviously, benefit from the ability to raise prices without losing market share to foreign competitors — and this might create jobs within the mining and metals processing sectors of the economy.
Companies that use steel and aluminum to make, package, or distribute their products — auto manufacturers, aerospace companies, energy companies, even beverage companies — would see costs rise. It’s important to note that there are vastly more jobs in metal-using sectors than metal-producing sectors, so the net effect on employment would likely be negative.
Tariffs would probably also boost inflation, as auto manufacturers and others may raise prices to offset materials costs.
Longer term, the key question is how other countries respond. The U.S. is a major exporter of agricultural products, for instance, and if countries assess retaliatory tariffs on farm goods, that could slow the economy. By Friday, the BBC reported that EU trade officials were discussing 25% tariffs on approximately $3.5bn (£2.5bn) of US-made goods.
Tariffs and the stock market
The market sell-off shows that investors generally don’t like trade barriers, especially when they’re a surprise. And, in fact, U.S. markets have generally performed better when trade is unrestricted.
For instance, the Dow had started to recover from the Crash of 1929 by early 1930, but plummeted again when the Smoot Hawley Act was voted into law on June 17, 1930, raising tariffs and setting off a trade war with Canada. The tariffs were removed in 1934, but the stock market didn’t recover to its pre-Smoot Hawley level until 1950.
Source: St. Louis Fed https://fred.stlouisfed.org/series/M1109BUSM293NNBR
More recently, though, and on a more limited scale, President George H.W. Bush imposed a tariff of 8 to 30% on imported steel in 2002. The European Union immediately threatened retaliatory tariffs. Other trading partners (Japan, Korea, China, and others) filed a dispute with the World Trade Organization, which was upheld in 2003 and $2 billion in sanctions were ordered. The U.S. withdrew the tariff in December of 2003.
What happened to the stock market? It fell sharply from 14,419 at the beginning of March 2002 to a low of 10,393 in September 2002; it began to recover that fall, however, and had retraced nearly all of its losses by December of 2003 when the tariff was reversed.
So the short answer seems to be that tariffs and trade wars do have a negative impact on stock markets. However, the fact that the Dow began recovering before the 2002 tariffs were removed suggests that it’s the shock of sudden changes rather than their real world consequences that drives market volatility.
What to do?
The president’s tariff announcement has already heightened volatility — and we can probably expect more surprises and more volatility as the story continues to unfold. In this environment, as in all environments, it’s important to remain calm, to stick to your long-term investment strategy and to try not to react to market noise.
If you have any questions, give us a call. We would be happy to walk you through the implications for your specific portfolio and strategy.