Economic Update: Tariffs From The Trade Sheriff

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Economic Update: Tariffs From The Trade Sheriff

US President Donald Trump has taken the first step to impose taxes on areas he sees as providing unfair competition to US firms.

Decisions such as imposing import tax duties of as much as 30% on solar equipment components and 50% on washing machines imported from abroad will mostly impact Asian companies. The president observes that the US solar panel industry is suffering the most with more than 80% of parts used for US installations being imported, primarily from Asia.

US Solar Equipment Imports

Source: International Trade Commission, 2017

This move sends a strong message from Trump that ‘America First’ is still a top priority. However, it seems the announcement had little effect across markets suggesting investors were well prepared after US authorities released indications that tariffs were on the way last year.

Why is it important for the US to impose higher trade tariffs?

The US has an import led (i.e. imports out-weight exports) trade balance deficit. In other words, the country is giving more money away to foreign countries than they are receiving. Imposing higher duties will allow the government to collect more money from foreign companies. They see this as helping to bridge the tax revenue gap after a reduction following the recent tax cuts in the US.

Higher import taxes are also likely to repel some of the companies who import goods and encourage demand for appliances produced domestically. It may also boost interests from foreign manufacturers to build factories within the US and lead to an increase in jobs.

Imposing higher tariffs is not something new coming from US presidents. Mr Trump’s predecessors had a similar vision but they did not, unlike Trump, follow through with their threats in a meaningful way because the costs turned out to be higher than the savings. Barack Obama’s tariffs on Chinese tyres saved 1,200 jobs, but at a cost of approximately $900,000 per job. George W Bush moved tariffs on steel imports which led to loss of around 200,000 jobs. This time, Mr Trump is putting 20,000 jobs at risk in an industry that benefits from cheap imports.

More trade tariffs imposed from the US seem highly likely, especially if they prove popular with the president’s voter base. A US ‘protectionist’ agenda is designed to spur domestic productivity, increase new jobs and collect more taxes from trade and domestic sales. History will be the judge.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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