Earlier this week, President Donald Trump imposed $50 billion in tariffs on Chinese imports. China responded in kind. President Trump is now threatening up to $400 billion in additional tariffs, and China is vowing to retaliate again. He then threatened a 20 percent tariff on cars imported from the European Union unless the bloc removes import duties and other barriers to U.S. goods, escalating a global trade war the EU warned could endanger $300 billion in commerce. Just yesterday, Russia threatened the U.S. with retaliation for tariffs on metals imports, warning that American cars could soon face higher taxes. Many of the EU nations are expected to follow with their own tariffs on US goods.
President Donald Trump’s looming trade war is no friend of the U.S. stock market, and that showed with all the major indices selling off this week. On top of that, growing tensions between the U.S. and its major trading partners have led to selloffs for emerging market currencies, as well as for developed markets like Canada, causing the dollar to get stronger against all other major currencies.
This cycle is not over yet. Corporations have begun warning investors that the tariffs and U.S. dollar’s rally could hurt their performance. For major companies in the Dow Jones Industrial Average and the S&P 500, foreign revenues contribute almost 50% and 40% of total revenues. This trade war is setting up the stage for dismal Q2 earnings season, with most companies likely to guide to a weaker Q3, irrespective of whether they will be impacted by the tariffs and a stronger dollar or not.
Future Wealth’s View
In his book ”Leaders Eat Last”, Simon Sinek states that great leaders create what he calls a “Circle of Safety”. By creating this circle, be it in companies, cabinets or summits like the G7, threats that employees or people feel within the group is reduced and frees them up to focus on the priorities of the organization or countries and seize the big opportunities. Great leaders create the circle by offering a strong culture based on clear set of values and beliefs. Without this circle of safety, people spend their time and energy protecting themselves and instead create subgroups or small tribes that advance their own interests.
By breaking this circle of safety and imposing tariffs, Trump has essentially disrupted the order within the group of nations. Where this will end, no one knows but suffice it to say that it is not going to be pretty near term for investors.
As Alexander Graham Bell famously said predicting the telephone’s widespread use – “Each town needs one”, every country just needs one sensible leader.