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How Much Should We Worry About Tariffs?

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How Much Should We Worry About Tariffs?

Written by: David Lebovitz

Economists and investors believe that free trade is a good thing, as it improves the welfare and consumption opportunities of all parties involved. On March 1, the president announced that beginning next week, the U.S. would begin to impose a 25% tariff on all steel imports, and a 10% tariff on all aluminum imports. Markets have found themselves under pressure in the wake of this announcement, as one of the largest risks for 2018 – the potential for more protectionist measures to evolve into a trade war – seem to be coming center stage. But how much should we worry about tariffs?

The first way to evaluate the risk is through an economic lens – total imports of steel and aluminum account for 0.2% of U.S. GDP, and domestic production account for 0.5% of U.S. GDP, highlighting that these sectors account for a small share of American business. Furthermore, one of the biggest concerns has to do with whether this is the beginning of a standoff with China; that doesn’t necessarily seem to be the case, as we get the majority of our steel and aluminum imports from other trading partners – steel imports from China only account for 2.2% of the U.S. total.

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That said, markets remain focused on the potential for this to escalate into a trade war, which would likely result in higher inflation, some sort of retaliation, and a subsequent deterioration in global trade and corporate profits. However, investors should take comfort in the fact that yesterday’s announcement only represents one step in that direction – the last time we took a similar step was 2002, and retaliatory action by our trading partners led those tariffs to be pulled after 19 months. We expect things could play out in a similar fashion this time around; both domestic and foreign pushback should minimize the chance of escalation, as the cost of a trade war would be high for all parties involved.

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