Trade tensions and your portfolio: What you need to know
A prominent economic story of the past year has been the growing tide of trade disputes across the globe. The U.S is at the center of it – most notably with China – which means investors are often subject to daily headlines debating possible implications for global markets and the economy. But are there reasons for investors to be concerned?
The short answer is that trade tensions are nothing new, and our country has dealt with the impacts of international negotiations many times over. Yet, as trade becomes increasingly global, its important for investors to understand the current environment and what may be ahead for the markets.
Challenges with trading partners for our nation go back to its founding. The Boston Tea Party of 1773 was a protest against taxes imposed by Britain on a number of products used by colonists.
Fast forward to when the U.S. economy struggled during the Great Depression of the 1930s, and Congress imposed the Smoot-Hawley Tariff. That legislation was designed to protect American jobs, raising duties on over 20,000 imported goods. Many of the targeted countries countered with retaliatory tariffs. As a result, trade activity dropped dramatically, contributing to global economic turmoil.
The U.S. economy picked up with the onset of World Word II and emerged as a dominant force in global trade. However, in the years that followed the war, Europe and Japan rebuilt their economies and by the 1970s emerged as trading powerhouses. This transformation in many ways set the stage for increased global trade as we know it today.
Trade has become increasingly global
In recent decades, a driving force behind increased international trade was the belief that benefits would extend to more people across the world.
Landmark treaties, like the North American Free Trade Agreement (NAFTA) established in 1994 between the U.S, Canada and Mexico, highlighted an extended period of open borders for the movement of goods and services. The European Union (created in 1993) represents another form of trade agreement, reducing barriers to the movement of goods.
Yet a common concern with many treaties is the belief that they benefit some industries while leaving people in others behind. For example, many U.S. farmers benefit from agricultural exports to other countries, and the U.S. generally has a trade surplus when it comes to services it supplies internationally. On the flip side, in the 1970s for instance, Japan’s automobile industry rose, while U.S. car companies struggled. We’ve seen similar trends with industries like textiles and steel manufacturers.
The current trade deficit shows that the U.S. economy is more dependent on imports than it is on exports. The last time the U.S. ran a trade surplus was in 1975. Since then, the trade deficit has risen significantly, peaking in 2006 at $761 billion (according to the U.S. Census Bureau’s Economic Indicator Division), before dropping and remaining fairly consistently between $500 and $600 billion.
Fast forward to today, where we find ourselves at another crossroad with trade. Take for example the recent implementation of tariffs on a variety of international products. These tariffs are aimed, in part, to help domestic industries that are losing business to lower-cost goods from overseas – a similar goal of past tariffs. Whether these industries and their workers will benefit over the long run remains in question.
There are other factors that bear watching. The primary concern for investors is whether tariffs will create negative economic consequences for the targeted industries, the U.S. or global economy.
Recently, trade tensions have had an impact on investor sentiment, with more people becoming cautious about the state of the global economy. In many instances, trade disputes can be a contributing factor to market volatility. This is because markets do not like the uncertainly that happens when global powers are negotiating.
The key takeaway is to keep an eye on trade developments and to not overreact to daily headlines. Remember that trade policies are just one of many factors likely to impact the economy and markets. Maintaining a diversified portfolio – that is reflective of the level of risk you are willing to accept to reach your own financial goals – is one of the best defenses to all types of market uncertainty.
Randy Groff, ChFC, CLU, CRPC, is a financial adviser with Ameriprise Financial Services, Inc., in Marshall.