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.