In mid May the wisdom of President Trump announced higher tariffs with China, he increased the limit from 10% to 25% on $250 billion worth of goods. In the President’s mind China will be a better trade partner though the increases, however China vowed retaliation even as Vice Premier Liu met US Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin.
Hopefully the negotiators will reach some sort of compromise soon and all will be better.
In an article by Adrian Morrow, examining the President’s tweets, the President believes tariffs are good economic policy. He suggested the cost of tariffs is borne by China. The President is a strange policy said he intended to use the money from the tariffs to buy American agricultural food products and donate them to lower income countries around the world. No details of whom the countries are; and the difference between what the US does in co-operation with the UN on food distribution.
Tariffs can be a very good tool to protect local companies in the production of their goods, as tariffs raise prices. The problem is small business owners Tiffany Zarfas Williams owner of the Luggage Shop of Lubbock, Texas noted 85% of the luggage she sells comes from China. In the past she had to raise prices 8% because of the tariffs. Now the prices of the luggage will rise again. The issue is the global supply system means goods are made in China and it is less expensive to build them across the sea, have the items put in a container and eventually make it to shops to sell than to make the items in the US. The 10% tariff did little to expand manufacturing, will the 25% or does it have to be higher?
For other suppliers, they raised prices by more than 10%, making an extra profit which means the base of President Trump is paying higher prices for their goods. Will prices go down when the tariffs are taken off?
Linking to dividend paying stocks, the global supply system has encouraged many items to be massed produced offshore. If you watch Shark Tank, the Sharks often say they know people who can reduce production costs (they mean offshore). The global supply system has evolved over 50 years and generally works to bring lower prices to the masses and allow margins to be consistent for the owners. Tariffs throw a wrench in the system and for the companies you invest in, where do their products come from? Can they raise prices and keep their healthy margins? Which one will collapse first? As an investor you are interested in the margins.
There are more questions than answers, till the next time – to raising questions.