Trade War Propaganda
Weekly Investment Update | By Brian Schreiner
President Trump has imposed the highest tariffs since the Smoot-Hawley Act of 1930. Averaged across all U.S. imports, it’s estimated to be the highest tariff rate since 1943.
The new tariffs have ignited a trade war causing stock and bond markets to, as one client observed, “bounce around like a bobcat in a bag of bullfrogs.” Meanwhile, politicians and the media have been keen to weigh-in, increasing investor uncertainty.
If every tariff commentator took a college-level exam in Advanced Macroeconomic Theory, I bet the median grade would be “D” or lower. The level of misconception around this topic is very high. Coming from politicians or their friendly media outlets, whether it’s misconception, ignorance or lies, it has the same effect as propaganda.
In economics, there are some subjects that are up for debate and others where the debate has been settled. Despite plenty of debate in the media today, economists agree on tariffs. Free trade benefits everyone.
We know that tariffs distort price signals, leading to a misallocation of resources as capital and labor are directed towards artificially protected, less efficient industries. We know that tariffs harm consumers through higher prices and reduced purchasing power. Tariffs shield domestic producers from foreign competition and diminish incentives to innovate.
We know that tariffs impede the benefits of international specialization and the division of labor, ultimately resulting in a lower standard of living. Economists have already proven that free trade fosters genuine economic prosperity through market efficiency and voluntary exchange.
When a government imposes tariffs, the stated intention is to protect domestic industry, support local jobs, and strengthen national economic resilience. Yet tariffs are rarely successful in achieving their stated aims, especially over the long term. Instead, they generate profound unseen costs, hidden disruptions, and massive economic dislocations.
The intention is to create visible (seen) short-term economic benefits, but tariffs introduce massive invisible (unseen) hidden costs including prolonged production delays, disrupted supply chains, resource misallocation, and loss of competitiveness. Tariffs artificially redirect resources away from more productive uses, locking up capital in prolonged, uncertain investment cycles.
Policymakers envision immediate, tangible benefits from tariffs, however, the unseen consequences loom much larger. These unseen costs can ripple through the economy for decades, far outstripping short-term benefits.
A tariff is a tax that must ultimately be paid by the end consumer. For example, the U.S. imports many car parts from Canada and is now imposing new tariffs on those parts and on steel and aluminum, so cars will be more expensive, and the American car industry will therefore be less competitive in international markets. It may benefit U.S. companies that produce car parts, steel and aluminum temporarily, but those benefits will be paid for, in full, by consumers. And the economic inefficiencies will cause additional costs all paid for by a reduction in the standard of living for Americans. When you multiply these effects across hundreds or thousands of goods, the effects can be very harmful.
Investment Implications
In our newly published Quarterly Investment Outlook, we discuss the investment implications in detail. In summary, the immediate impact of trade wars is an overall increase in economic and financial market uncertainty. At an industry level, disrupted supply chains and resource misallocation will disrupt business activities. Companies will become less competitive in the global marketplace and resources will be allocated in ways that are not optimally productive.
We believe, like J.P. Morgan, that the probability of a U.S. recession is now over 50%. If the U.S. economy does go into recession, the Federal Reserve may want to cut interest rates to stimulate growth, but tariffs are likely to result in increased inflationary pressures, and if the bond market continues to show weakness, they may be forced to leave rates unchanged.
We have managed portfolio risk by increasing allocations to short-term debt instruments and maintaining a large allocation to gold and natural resource commodities. In an investment environment of increased risk and uncertainty, we believe investors should look for opportunities outside the U.S. while reducing or eliminating allocations to overvalued domestic industries such as technology and financial services. α
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To learn more about how we are investing for clients and for our current views on the global investment landscape, download our 2025 Investment Outlook.
Interesting things I came across this week…
How tariffs could rebuild American manufacturing (Jim Rickards)
Peter Boockvar talks tariffs & investment strategy (The Market Huddle)
What’s going on in the Bond Market? (Jim Bianco on CNBC)
Violent, suspicious deaths of Putin foes (60 Minutes)
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