A Rational Look At US Trade Policy

A Rational Look At US Trade Policy
geralt / Pixabay

Dear Investors,

Play Quizzes 4

The big news lately has been Trump’s announcement of a 25% tariff on imported steel and 10% tariff on aluminum. The market took the announcement as a shock (dropping a bit over 1% for the day) although the Trump Administration had been talking about steel and aluminum tariffs for almost a year. The announcement raised fears that Trump was going to start a trade war. The fear is that other countries will retaliate by imposing tariffs on US goods they import, then Trump will retaliate with more tariffs, and we’ll have a tit-for-tat escalating tariff and trade war. Here are three points to remember about tariffs and this new market fear.

Check out our H2 hedge fund letters here.

How A Weakening PE Market Serves As Another Sign Of A Weakening Economy

InvestAmid the turmoil in the public markets and the staggering macroeconomic environment, it should come as no surprise that the private markets are also struggling. In fact, there are some important links between private equity and the current economic environment. A closer look at PE reveals that the industry often serves as a leading indicator Read More

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

First, for some reason, enacting steel (and other) tariffs has been en vogue among presidents. Although the steel industry employs only about 140,000 people compared to the steel-consuming industries that employ more than 6,000,000 people, the industry side with fewer workers is viewed as needing help. George W. Bush and Obama both enacted steel tariffs. The Obama tariffs were enacted to target specific types of Chinese imports, such as Chinese tires in 2011. Prior to that, Clinton and Reagan also enacted tariffs on various imports, although Clinton’s tariffs were smaller and more targeted. The point is almost every administration makes some sort of ham-fisted attempt at protecting domestic industries via tariffs. The tariffs usually don’t work well and don’t last long. Bush’s steel tariffs lasted only 20 months, for example. In and of themselves, the newly announced tariffs are small and largely meaningless to the domestic and global economy.

Second, tariffs are usually regarded with hysterics by the media and market commentators. It’s difficult to separate cause and effect when it comes to trade wars. Throughout history, most trade wars have occurred during periods of recession or depression. When faced with a shrinking economy and job losses, governments often turn to protectionist measures to try to help protect domestic industries. Thus, any time tariffs are brought up, you’ll see scary charts showing how the stock market drops when large tariffs are enacted. Never mind that many times the market was already falling, and the tariffs were enacted in the midst of a recession or depression. It’s also worth noting that the media and most conventional economists are staunchly pro-trade with few exceptions.

While I’m of the opinion that the current tariffs are pretty stupid (protecting an industry with only 140,000 people at the expense of industries with 6,000,000 employees doesn’t make much sense), I do not think that all free trade is good all the time. There are pros and cons that need to be carefully weighed. But, the media tends to overreact and there is rarely any nuance.
Finally, we believe it is going to be difficult for Trump to unilaterally enact a trade war from the executive office. While it is true that the executive branch has wide ranging authority when it comes to tariffs, a lot of that authority comes into play only in certain circumstances and only under certain justifications.

For instance, Trump’s steel and aluminum tariffs were enacted using national security justifications (despite objections from the Dept. of Defense). Trump also has a habit of taking to Twitter and undercutting the rationale and legal basis for his own policies. Just as his tweets undercut his travel bans, so now are his tweets on tariffs. For example, he recently tweeted that steel and aluminum tariffs on Mexico and Canada might go away if NAFTA renegotiations were favorable; thus, he has undermined the “national security” justification.

It is going to be exceedingly difficult for the administration to argue further, escalating tariffs on other goods under the same national security rationale even if Trump stays off Twitter. For example, this past weekend Trump tweeted about increasing tariffs on imported European cars. How on earth would the administration be able to justify that importing civilian passenger vehicles is somehow a national security issue?

Congress can also easily override anything Trump does by passing legislation that undoes the tariffs or removes some of the executive branch’s previous tariff authority. Considering the amount of lobbying and corporate money in Washington, we don’t see how the global business community, which is almost all united against tariffs, would do nothing. We are already seeing Congressional pushback against the tariffs from powerful political figures like Speaker Ryan and Kevin Brady, Chairman of the Ways and Means Committee. In fact, look at the recently passed tax bill to see how powerful corporate interests are deeply entrenched in Washington. The bulk of the tax cuts go to corporations, not individuals, and the individual tax cuts expire while the corporate cuts are permanent. If Congress and corporate America can pass a huge comprehensive bill like that, we see no reason why they will not stop a trade war.

No Company Profiled

No Company Profiled This Month.

About Our Portfolios

The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.

Spoke Funds are significantly less expensive and more transparent than a large majority of mutual funds. Both portfolios are managed for the long term using value investing principles. Fees for both portfolios are 1.25% of assets annually. That figure includes both our management fee and all trading costs. We try to minimize turnover and taxes as well in both funds.

Investor accounts are held in your name (we never take investor money) at FOLIOfn or Interactive Brokers*.

For more information visit our website.

*Some older accounts may be custodied at TradePMR.


Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

Article by Ben Strubel, Strubel Investment Management

Updated on

Ben Strubel earned a Master’s in Business Administration in Investment Management from Drexel University’s LeBow College of Business in Philadelphia, PA. He was inducted into the Beta Gamma Sigma honor society, the highest academic honor society for master’s degree students. While at Drexel, Mr. Strubel founded the LeBow Graduate Investment Management Club and the DragonFund Large-Cap Fund, which was responsible for investing $250,000 of Drexel University’s endowment. He also holds a Graduate Certificate in Financial Planning from Florida State University. He earned a B.S. in Information Technology from Rochester Institute of Technology in Rochester, NY. He teaches classes on finance and investing at Harrisburg Area Community College and for Manheim Township. Mr. Strubel also writes for several investing websites including Valuewalk.com and SeekingAlpha.com. He resides in Lancaster, PA.
Previous article Corporate Tax Rate Changes Distorting Reported Earnings
Next article Researchers Develop New Heat Switch For Electronics

No posts to display