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Tariff Boost: A Cheap Thrill?

Mar. 01, 2018 10:39 PM ETCMI119 Comments
Jeff Miller profile picture
Jeff Miller


  • Markets reacted sharply to the proposed increase in aluminum and steel tariffs.
  • Trade issues are widely misunderstood, yet the theory commands widespread economic consensus.
  • Appeals to local producers have a political appeal - usually greater than the implications for consumers.
  • The instant reaction of markets, foreign countries and US consumers makes this policy change unlikely.
  • Some unfairly punished companies are on sale.

New Fed Chairman Powell had just finished his Senate testimony. Market participants were digesting the morning’s economic data and the likely Fed reaction.

Then... something happened. Normally, I am skeptical of the post hoc analysis of market moves, but this one was clear. President Trump announced the intention to raise tariffs on steel and aluminum. Stocks for those companies moved higher. Steel and aluminum consumer stocks moved lower - much lower - as did the entire market. Unlike most market moves, the causation was obvious.

With today’s stock declines added to those of the last two days, many investors are paying attention. I want to do a factual analysis of the situation and then venture some suggestions for investors.

Can the President Do This?

Simply put, yes. Congress has delegated very broad powers to the President. Even when policy is shifting, requirements are for consultation, not formal approval. If the President invokes a national security threat, the authority is even greater.

The Congressional Research Service analyzed the powers, noting the potential for challenges in court. Perhaps, but the inherent delay in that process would render this response irrelevant.

The Peterson Institute analyzed these powers before the election. This table provides a nice summary.

A screenshot of a social media post Description generated with very high confidence

What are the Economic Issues?

The key question relates to the costs and benefits of free trade for a particular country. Wikipedia may not be the leading source on economics, but the basic story is often both clear and accurate. Here is the entry on the key concept underlying free trade:

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of

This article was written by

Jeff Miller profile picture
Seeking Alpha mourns the passing of Jeff Miller, on May 7, 2021. During his time at Seeking Alpha, Jeff attracted a following of close to 40,000 readers and published more than 1,500 articles. He was a portfolio manager at Incline Investment Advisors, LLC. Jeff also was President of NewArc Investments, Inc., and served as a university professor.....................................................................................................................................Jeff is Portfolio Manager for Incline Investment Advisors, LLC.,manager of both individual and institutional investments. A registered investment advisor, he was formerly President of NewArc Investments, Inc. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for a trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of a small technology company. He occasionally serves as an expert witness in legal cases involving financial markets and hedging.

Analyst’s Disclosure: I am/we are long CMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (119)

Some argue that DJT is a clever "negotiator", but the last few photo ops on tariffs, guns and daca, show the opposite on live TV, eg when seeking some form of confirmation (let alone anything resembling a "close") on future investments even in their industry from his steel and aluminium executives, he got a very telling silence in response - not a single "yes" or positive nod - nothing, just executives looking around for anyone else to confirm what they could not themselves confirm - my take is that there will be no new investments in this non-competitive sector from this decision! He cannot even close a deal with anything sensible in return for handing them massive benefits! Sales 101?

It is all acts driven by his narcissism (with an extreme need to receive confirmation of his own greatness/ego), unfortunately influenced by Bannon's antagonistic world view.

So, he will rather double down than admit to having made a mistake, until he feels the risk (to his ego) of continuing down the path of trade war bigger (eg risk of impeachment or financial supporters threatening not to fund his next campaign), but that might be way down the line...

The already announced tariffs (in any diluted shape and form) should not be material, and other nations will probably all try to avoid an escalation, but when will the next Trump escalation or issue come? DJT is a psychological wreck and a high risk, just no idea of when fear of the next madness exceeds bullishness in an otherwise healthy economy...
Namron Damron profile picture
Tom, am afraid you are right.
-tariffs not much of an impact but some stocks will benefit (these small moves are more of giving one side (Wilbur Ross) a win for something Wilbur believes strongly about. The impact is the market's view of tariffs, not the actual impact on our economy.
-tax reform big shot to business but time will tell if it pays for itself. I hope it doesn't add to our deficit and debt greatly.
-ego threats: Mueller investigation, Jushner and Ivanka under pressure, general lack of popularity, more well known and popular Rep speaking out against him (this hasn't had an effect thus far), etc. T has a very tough shell that is almost imperviable which is one of his personality defects.

All this said, he is POTUS and we have to let things play out. I am continuing to stay focused on actual results.
Chaffey profile picture
"As ye' sew so shall ye' reap!"
I believe that the whole point of the announcement was not to protect steel and aluminum industries, but rather to put our trading partners on notice that our expectation going forward is for FAIR TRADE which means reciprocal treatment by both partners. So if you have no tariffs and/or unfair subsidies of industry, then no tariffs will be imposed on your products.

This is in sharp contrast to so-called "FREE TRADE" in which the US markets are free for all, but foreign markets are only partially open to US producers. This has been the objective of the WTO and multinational corporation, with the end result being 30 years of US wage stagnation and millions of jobs moved over seas. In exchange for lost jobs and wages we got stores filled with cheap foreign goods.

So this was more of warning shot than a trial balloon. Only time will tell what exactly will happen, but as the table above shows the President has broad powers with regard to trade. The long-term goal is to have other countries lower their trade barriers, but for that to happen we will raise some of ours (at least temporarily).
Thanks for the article, I appreciate having your thoughts on this issue.
China routes steel through about 8 different countries to the US to make it look like they're not a big exporter to us- educate yourselves, don't get played by China and mislead by idiot reporters and newscasters who nothing about business- they were journalism majors and they're functioning retards. Educate yourself!!
Namron Damron profile picture
Hal2010, agree, any world commodity dumped anywhere in the world usually has an effect on everyone but more on the high cost producer. I am sitting back to watch the impact on the steel and aluminum industry. For anything meaningful to occur, the tariffs will need to be in place for a long time which gives everyone time to make changes to their distribution channels. If this supercharges our US steel and aluminum manufacturing without costs going up in the world (but rather going down), I'd say it was successful. If the tariffs end up protecting high cost producers, it will collapse from its own weight eventually. Hard to play around with economic fundamentals and the need to buy good quality at the best price.
anybody thinks this is just a "trial balloon" or just the opening offer of a negotiating ploy doesn't get this president. This is going to stick until the Chinese stop cheating or the WTO rules against us. The Chinese will never stop cheating, and the WTO will take at least 2yrs to work thru this, so it'll last for about that long. Any thoughts that Trump isn't serious on this one are coming from weak minds that are simply guessing.
This "trial balloon" will last just as long as China,Canada and Brazil don't reciprocate in kind within a few weeks of when DJT makes it effective.
These tariffs are BAD for business,BAD for consumers,and BAD for America...but DJT doesn't care about that,bullies don't think about the consequences of their actions,just the instantaneous reward of stroking their selfish and warped egos,which is what these tariffs do!
Thank you for the article; steel has always been a hot political issue with pres Truman wanting to take over the steel mills and the Republicans wanting to break the powerful unions because of their Democratic party affiliations; so after a few decades nothing is left and finally a President is acting as promised; the pendulum is swinging back and some investors will lose and some will win; following are articles on Kobe Steel of Japan which makes me question all this free trade debate


Peace Grunt USMC profile picture
When the NCAA gets upset at one of their prime time big $$ basketball programs like a Kentucky or a N. Carolina for breaking the rules they come down hard . . . on Cleveland State or some other small revenue school.

So Trump is upset at China so naturally he attacks Canada. LOL
Chaffey profile picture
Well today the Stock market recovered incrediblely...perfect in fact....so therefore Trump must be a genius ...RIGHT?????
Right,and I have some wonderful swamp land for sale in Florida,next to another swamp,Great location,Great views,quiet,no neighbors,any takers???
There is not much government support for the steel industry in Canada and it is in decline as in the U.S. Steel exports are not subsidized.
7491... I read the article on the Bush steel tariffs. Quite a negative reaction in the markets back then. However if countries are subsidizing their exports what is the US suppose to do. Would another option be to increase government payments to our steal industry? Then those payments would come out on the backs of taxpayers. Not really fair to the US taxpayer.
In any event I think we in the US have to decide what to do; so that it is in the best interest of our country not China or Canada or any other country that subsidizes its exports.
decide wisely based on facts and history as Jeff is trying to point out.

Jeff Miller also said the Trump tax cuts had no chance of becoming law.
Jeff Miller profile picture
5731311 -- What I said was that I did not expect the tax bill to pass in 2017. I was definitely surprised by the changing positions of the deficit hawk group, voting for a bill that was way beyond their stated limits.

I also said that I expected a bill in 2018, but that it would require bipartisan support.

The story of how the winning coalition got those last few votes would make a good case study for a course on Congress. (So would the story of the last few votes for ObamaCare).

Namron Damron profile picture
5731311, before the process got a head of steam, I would surmise that 80% of those interested thought the tax bill had no chance. Ryan had the basic tax cut package in storage for quite some time and could not get anyone in Congress or POTUS before Trump to embrace the dramatic cuts to business tax. That is what the tax cut is all about. A huge shot in the arm to business that will hopefully have the intended impact. I am still thinking about this but providing tariff assistance to steel and aluminum companies after giving them a 14% break on taxes is seems like overkill. I figured if the tax cuts do what the politicians say they will do, giving business an extra 14% to work out their business difficulties was enough. But, I am still evaluating the rationale behind the steel and aluminum tariffs. I just hope the tariffs don't push the problems over to other businesses which end up on the losing end.
Namron - "I am still thinking about this but providing tariff assistance to steel and aluminum companies after giving them a 14% break on taxes is seems like overkill."

One need only identify the States where steel and aluminum employ Americans, mostly union workers too, to know that his move is NOT overkill, but seen as another downpayment on ensuring that workers in those industries, e.g., Pennsylvania, Wisconsin, and Michigan, will again favor our President in 2020 and perhaps his Party this November, with their votes. Many have already been given a reason with those $1,000+ bonus and pay raise "crumbs" resulting from a promised Tax Law which was only passed with Republican votes. http://nyti.ms/2FTKyzS and http://cbsn.ws/2Fbkj73 Expanding the voter base seems to be a smart move.

I just wonder how much time somebody who just got some "crumbs" will spend believing the view that things haven't gotten better for them and be stupid enough to vote against those who put money in their pockets.
WAY TOO POLITICAL. Jeff, your columns usually inspire levelheadedness. The rhetoric in this post, which I agree with some and not others, is not the purposes of your articles. I am faithful follower of your posts, but if this becomes a rant of the disillusioned, I can find better places to see this kind of spewage, Can't wait to see WTWA on Sunday.
Jeff Miller profile picture
Retired -- when something is the most important factor in the markets, you cannot put your head in the sand. I analyze the legal background, the economic effects, and the likelihood of actual implementation.

This is pretty much what you need to do if you are trying to cope with the effect of events on your portfolio.

Others may focus on political opinions or partisan viewpoints. I do not. The fact that I discuss an issue does not make my work political.

It will be difficult to avoid this topic in WTWA. As always, I'll try to be balanced.

Namron Damron profile picture
Jeff, IMO, there was nothing biased in your article. Just the facts and your opinion about how those facts could play out. Good work.
Sorry Jeff. Your article was as usual non-political and very well argued (which is why I read them). I should have said that the comments to your article were unusually "passionate", read political.

Yes it is difficult to avoid talking about the potential impact of political events on the stock market - as we now see they have a very numerical effect, volatility-wise and price/value -wise.

I took your wise forecast of bearishness in WTWA last week, trimmed some position and minimized the slaughter.
You are going like this especially Jeff

Jeff Miller profile picture
7491 -- Yes, it is an apt comparison. Thanks for the link since I would certainly not have seen it on my own:)

The link from 7491 is zero hedge and they have little but not zero credibility. So i checked the facts if I ever read a link to them.

The link shows a slide in the S&P around the time tariffs were proposed around 2002. Talks about the slide being tied to tariffs. What needs noting is that the relationship maybe small, the market had been sliding since the peak.

The S&P had been sliding since the 2000 peak and the interest rates and the P/Es at that peak were nothing like now.

Jeff writes a lot of good articles but perhaps some comments about what I just mentioned would illustrate that the slide mentioned was not a tariff issue.
credibility even on this site must be questioned as writers have a commercial interest so everything you read likely has two sides and you then decide how to weight the risk..
the trade war issue has been recently been raised by one of the editors.


Tom Armistead profile picture
I'm resisting the temptation to try to pick winners from among the potential casualties of a trade war.

I remain focused on reducing the damage to my own interests if Trump manages to do permanent damage to the economy and financial system, as seems increasingly likely.
Free trade works only if all countries are honest. China as it is believed has been cheating and 'dumping.' Isn't it a fact that China has a huge over-capacity in steel? So how will they retaliate?
China has built a steel industry that produces 50% of world steel. And it has built a capacity to produce far more. Accept that, and you accept China dominating a critical industry. Dismantle your steel industry, and you will be dependent on China's benevolence.
Chaffey profile picture
16% of steel in the US comes from Canada. The biggest exporter to the US. It is mostly rolled steel used in making unibody frames and panels for car manufactures in the US. You will pay 25 % more now for that.Those are toyotas ,GM ,Ford BMW Mercedes... you name it .
I am somewhat confused, help me out. Is it better to have more imports or more exports as a country? Most would probably say more exports. As I understand, we have been importing more than we export for years. How do we get our trade in line? Some would say sell more overseas. I would think we have been trying that for years with a net trade deficit. Buy American may help in the long run, but that is a slow process. Let's do what China and Canada does. Why not invest government money in select industries like steel and send that subsidized metal overseas at a discount to market. We would grow a strategic industry, improve employment, and help align our balance of payments.
Sanjay John profile picture
Exports are equal to imports. The primary reason to export something is to import something back.
This does not show up in trade data because the data is incomplete.
See my other comments here above.
I am seeing a lot of comments about Canada. Just because steel crosses the border from Canada to the US does not mean that all of that steel was produced in Canada. Some of that steel is coming from China. The same is true for some other countries. Trade agreements are good if everybody plays by the rules. Tariffs in general are not a good thing but sometimes temporarily they can get peoples attention and pull them back in line with original agreements.
leearther profile picture
a lot of grousing over policy.
right, wrong, its done
bigger question, can we profit?
Cmi bought, where's more?
"a lot of grousing over policy.
right, wrong, its done
bigger question, can we profit? "

The prophets will profit. Many others will be too confused to act. Like
deer staring into the upcoming headlights.
There is a broader “play” here. The tariff will rattle the cages of China (deserved) as well as hammer Canada (Trudeau) to get on board with stalled and non-productive NAFTA re-drafts. He’s basically telling both to fall into line or face the consequences. This move is all about leverage and positioning and has little to do with creating jobs domestically. The author’s comments about David Ricardo are spot on...I teach others about him all the time.
Absolutely. A message is being sent : the US will no longer treat the health of its internal economy as secondary to global alliance considerations. We did that during the Cold War. But the Cold War is long over, and we must look first to the health of the US economy. Running a permanent 4% of GDP deficit will over decades weaken us. You would never know from the comments that the US has been running a trade deficit since about 1980.
JrMastermind profile picture
I would tend to agree. Obama was, first and foremost, a politician, thus his decisions were best understood when viewed from a political perspective.

Trump fancies himself to be a negotiator ... perhaps a narcissistic, cut-throat negotiator who is utterly indifferent to any concern other than getting his way, but a negotiator nonetheless. One begins to see the method to his madness when viewed from this perspective.
Steve Rasher profile picture
Mastermind: Your point is starting to become clear to me as well. Everything he does is from the perspective of a negotiator, but what I am afraid he doesn't perceive is that what are the appropriate and successful negotiating tactics in one forum or business setting don't necessarily work in another. Simply put, business may be business, but business is not politics and certainly not international politics. Steve
thorgood4 profile picture
CMI not cheap enough yet
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