Davos, Trade Policy & Trump
President Trump attended Davos last week and gave a speech that promoted his “America First” agenda. Sound bites from the speech included, “There has a never been a better time to hire, to build, to invest and to grow in the United States. America is open for business, and we are competitive again.” Another portion of the speech stated, “But America first does not mean America alone.” President Trump’s comments suggested more openness than prior speeches. He even declared he would consider negotiating with a group of countries as part of a trade pact.
While Trump appeared ready to negotiate in Davos, some of his actions and rhetoric back home indicate otherwise.
We examine some of the prior and ongoing trade reviews initiated or supported by the Trump administration in this week’s Policy Insights.
Solar Panels & Washing Machines
The Trump administration levied a 20% tariff on the first 1.2 million of imported washing machines, which increases to 50% for imports above that number. LG Electronics, who the complaint was filed against, represents 9.2% of the U.S. market share and said it will be raising prices because of the tariffs. U.S. based Whirlpool Corporation (WHR), with 43.8% market share, may be positioned for strong growth. (See last week’s Policy Spotlight for similar policy analysis of solar tariffs impact on First Solar.)
Steel & Aluminum
The Trump administration initiated a Section 232 study, requesting the U.S. Department of Commerce “…consider the domestic production of aluminum needed for projected national defense requirements…”. Commerce Secretary Wilbur Ross handed Trump reports for steel and aluminum on January 11, 2018, and January 22, 2018, respectively. President Trump now has 90 days to act on the report.
We believe companies such as U.S. Steel (X), AK Steel (AKS) and Nucor (NUE) could be positively impacted from steel tariffs, while companies such as Alcoa (AA) and Kaiser Aluminum (KALU) may benefit from aluminum tariffs. We think tariffs will be ultimately imposed on foreign steel and aluminum.
Canadian Softwood Lumber
The U.S. International Trade Commission (USITC), announced on December 7, 2017, its determination that the U.S. timber industry is materially injured by imports of Canadian softwood lumber. 94% of Canadian timberland is publicly owned and managed by the government which also sets the prices charged to harvest Canadian timber. The U.S. equates this activity to a subsidy, rather than a competitive marketplace like in the U.S.
We think timber REITs such as Weyerhaeuser (WY), Rayonier (RYN) and Potlatch (PCH) may benefit from the imposition of tariffs. Homebuilders and manufacturers using lumber as raw materials could be negatively impacted by increasing lumber prices, which could decrease their margins.
Aircraft Trade Review
On January 26, 2018, USITC issued a unanimous determination that imports of 100-to-150 seat Canadian aircraft don’t materially injure or threaten U.S. industry. While the decision came as a surprise, the Boeing-filed complaint was factually difficult to overcome. Boeing (BA) doesn’t compete directly with the mentioned Bombardier aircraft and didn’t bid on the 2016 Delta (DAL) order, which was at the heart of the dispute.
The USITC’s rejection of the Trump administration’s proposed 300% tariff shows the limits of the administration’s authority to reshape U.S. trading relationships. However, the President asserts more control over other trade remedies, such as Section 202 and 232 trade reviews.
We ultimately think more trade reviews will be initiated, potentially impacting additional sectors.
Potential Trade Retaliation
With trade policies under review and tariffs being imposed, the potential for retaliation and a trade war are enhanced. For example, the European Commission levied a $2.7 billion antitrust penalty on Google (GOOGL) in June 2017 and hit Apple (AAPL) with a $14.5 billion tax bill in 2016. Facebook (FB) and Uber have also faced increased scrutiny.
Additionally, Canada filed a new trade suit against the U.S. this month in response to the aircraft review. This back and forth could potentially escalate to the point of global trade disruption, which would likely spook the stock market. We will be watching any further trade actions closely.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Active Weighting Advisors LLC ("AWA") is an SEC-registered investment adviser that manages ETFs under the brand name EventShares. Mr. Phillips is the Chief Investment Officer of AWA. The views expressed are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. AWA is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. Mr. Phillips and AWA disclaim responsibility for updating information. In addition, Mr. Phillips and AWA disclaim responsibility for third-party content, including information accessed through hyperlinks. For more information about EventShares, contact us by calling 877.539.1510 or visit our website at www.EventShares.com.