Newton’s Third Law at Work in the Trade Dispute

When Harley Davidson (NYSE: HOG) announced that they were moving some production overseas due to the proposed tariffs from the European Union, President Trump tweeted that he was surprised by the move. He also criticized the company and went so far as to say that it would be “the beginning of the end” for the company.

It really shouldn’t come as a surprise that a company would shift production to another area in order to avoid an import tariff. It is simply Sir Isaac Newton’s Third Law of Motion at work. For those that may not know, the third law states:

For every action, there is an equal and opposite reaction.

We place more or higher tariffs on goods from the EU, they place more or higher tariffs on goods from the US. The same principle applies to Canada, China, and Mexico. But the actions and reactions don’t stop with the placement of new tariffs. It will also apply to the labor markets.

If we place tariffs on automobiles from the EU in order to try to protect or grow employment in the domestic industry, there will be job losses in other industries as the tariffs are applied to construction equipment or agricultural products. We may gain 1,000 jobs in the automotive sector, but we will lose 1,000 jobs in another industry. By placing tariffs on Canadian steel and aluminum, we may gain 1,000 jobs in those sectors, but we will then lose 1,000 jobs from an industry like household goods—one of Canada’s proposed tariffs is on washing machines, refrigerators, and dishwashers.

International trade is not a zero-sum game where one side wins and one side loses. The more restrictions there are on trade, the more everyone loses. Consumers are faced with higher prices and this causes the demand to go down. When the demand goes down, the production drops and the economy slows. Workers are laid off and the economy slows even more. And I am not just talking about the domestic economy, I am talking about the World economy.

I have posted a number of articles regarding the trade dispute and I have said all along that President Trump was right to address the inequities in international trade. However, I have also pointed out that I was concerned about his approach. Now we are starting to see my concerns are warranted.

If there isn’t a compromise reached soon and the variously proposed tariffs from all the different parties go in to effect next month, it will kill economic growth worldwide in the third quarter. The impact would be felt in the earnings season that will kick off at the beginning of October. Gee, why does that sound bad? A possible bear market starting in October, that has never happened before has it?

Of course, I am being sarcastic as collapses and bear markets have often started in the month of October. The two most recent bear markets both started in or gathered steam in October. Of course then there was the historic crash in October 1987 and the crash in October 1929.

I have been somewhat cautious with my market outlook going back as far as last December. The main concerns were the extreme bullish sentiment, the overbought levels of the indices, and the age of the current bullish phase. Now my biggest concern is that cooler heads won’t prevail in this global trade dispute. Negotiation and compromise seem to be four-letter words to world leaders right now and they are the two things we need most right now.

If we don’t get some agreements in place and the tariffs do go in to effect, I would start shifting money out of equities and into fixed income immediately and aggressively.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

5 comments

  1. I’m not familiar with tariffs imposed by the EU or countries in the EU or even China or Japan. But apparently dairy products from the US are slapped with a 300% duty or tariff in Canada and beer is heavily restricted. It would not be surprising if other US products are similarly taxed by Canada and other countries.

    I think the Administration should publish the tariffs other countries are charging us so everyone can see why he is doing what he does.

    • I know I was stunned to see a 300% tariff on dairy going into Canada, I am not doubting your trade advice, I agree with that, but do think if the tariffs we face were publicized. Trump administration action might be understood by many more people. Forgive my ignorance, is there somewhere to go to get this Tariff Rates in and out of the country? I truly would appreciate the information!

      • I only know about the dairy and beer things because my niece lives in Canada and my brother told me about it after he visited her.

        I wonder why people like the author of this article don’t publicize the tariffs US products face in other countries. He seems to have the resources and knowledge to do it.

        I think tariffs and duties should be even across all products and low. I don’t approve of the government choosing to favor some companies or industries.

        However, I can understand President Trump trying to get other countries to reduce theirs by threatening to increase ours. I do wonder how well that will work.

  2. Do you really think that a “precious” metal like Gold and Silver will make up the worlds currency standard/backup? Teeth and some good conductivity, etc.? It’s also very heavy. What makes THIS/THESE such great resources to back up the world’s monetary woes?

  3. Wow, hard to believe how some people can get so focused on a minor issue like milk to Canada. the US is subsidizing milk farmers in huge amounts, that’s what makes US milk cheap. the Canadian response for years has been to have a marketing board policy, which is protected by tariffs, so that the much smaller Canadian farms with their 120 heads of milk cows can survive. Friends in Arizona have 15,000 milk cows, acquired via subsidies. The Canadian marketing boards are a counter measure to ensire some milk is made close to home..
    In any case the market impact of milk is small.
    And Canada made reciprocal concessions under NAFTA on other products that counterbalance the milk. International trade deals are not 1 product deals, they balance across various product ranges. to pick out one is just myopic.

    The big news is that on July 6, 25% duties will come into effect on 818 Tariff codes of products imported from China. They cover a very wide swath of products that will impact many US manufacturers and then b2b and consumers. They cover all manner of electronics, machinery of all sorts, for example to many items to count. The whole USA will not look the same on July 7. May jobs will be lost, a good number of businesses will go under. There is simply no way for US businesses to source equivalent products in the US or elsewhere, certainly not in the short term, and not even in the medium term. The result will be inflation and a slowing of the economy.
    There may not be nuclear war in North Korea, but there will be nuclear upheaval in the USA come next Friday.
    Rick is advocating for cooler heads to prevail.
    Unfortunately, the heads that need a bucket of Gatorade dumped on them are all in the White House. If they persist on the path, this will end in a US and world-wide recession.

Leave a Reply

Your email address will not be published. Required fields are marked *

*