Recently my daughter had been relentlessly asking for a trampoline for her upcoming birthday. Sadie is now 12, and she has been asking for a trampoline for about three years now. My wife and I have been united in not allowing this purchase until this year. The final decision, however, was made in her favor because of a few subtle tactics.
First, Sadie’s repeated attempts at asking my wife finally broke her down to the point where she told Sadie to go ask me. Next, she sent me a message that stated the clear benefits of her getting a trampoline, including: more time to work on her gymnastics, more exercise and less time on electronics. She knew some of the items I value and made this clear in her sales pitch. Sadie’s twofold strategy for negotiating a trampoline purchase finally paid off.
Will Current Negotiations Pan Out?
Everyone has slightly different tactics they use during negotiations. Currently, we are witnessing the beginning of some of the largest negotiations our country has seen in many years. President Trump has enacted policies that encourage tariffs on the products of other countries with the hope that these countries will come to the table to negotiate more favorable trading terms with the United States. If the negotiation tactics work, this could create favorable trading deals that would benefit the United States for many years. If this tactic fails, we could lose on many different fronts for years into the future.
Before we explore this more carefully, I’d like to share information with you to articulate why many believe that the U.S. is being treated unfairly by many countries around the world as it pertains to trade.
Explaining Tariff Reciprocity
Trying to find non-partisan information regarding the fairness in trading practices is not an easy task. Fortunately, I was able to find a chart produced by JP Morgan from information collected by the World Trade Organization and the World Bank.
The chart shows the average tariffs on all traded goods with various countries around the world prior to recent negotiations. The vertical axis on this chart shows the percentage in tariffs that the United States applies to the other country’s goods. The horizontal axis shows the percentage in tariffs that other countries apply to U.S. goods. The reciprocity line is designed to show equality in tariff rates.
For example, if a country falls on the reciprocity line, that would indicate the country is applying tariffs to U.S. goods that are similar to those we are applying to their goods. So hypothetically speaking, if ABC Country applied a 4% tariff on U.S. goods and the U.S. applied a 4% tariff on ABC Country’s goods, the ABC Country dot would land squarely on the reciprocity line where 4% meets.
Any country that is below the reciprocity line indicates that the U.S. is incurring unfavorable tariffs relative to those imposed on that country. Likewise, any country that falls above the reciprocity line indicates that the U.S. is incurring more favorable tariff rates relative to those that are imposed by the U.S. on that country’s goods.
Pros and Cons
The chart clearly illustrates that the U.S. is subject to unfavorable average trading tariffs when compared with most of the developed world. Many view this as unfair, and believe that it puts the United States at a competitive disadvantage.
Others say that it could be argued that this unfair treatment comes with its perks. Three benefits mentioned by Michael Cembalest of JP Morgan include access to low-cost consumer goods, higher corporate profits, and the ability to gain negotiating leverage towards geopolitical objectives.
Regardless of which camp you are in, there are a few things worth noting as it pertains to potential outcomes. The Riverfront Investment Group summarizes potential policy outcomes along with what they believe the odds are for these outcomes occurring:
|Pessimistic||40% chance that a trade war ensues.|
|Basecase||30% chance that growth accelerates thanks to deregulation, tax reform, and accelerating pay increases.|
|Optimistic||30% chance that the economy gets an additional boost from opening the Chinese market to more imports.|
So what should you do?
Historically speaking, I have personally witnessed more negative outcomes when people try to make bold investment decisions during emotionally charged times. We believe that ultimately, the emotions associated with the current trade war have already been priced into the market.
From this point forward, one of two things will occur. Either things will get better than what we presently expect, or things will get worse. Unfortunately, there has been no investor in the history of the world that I am aware of, who has consistently been able to outsmart what the markets already have predicted.
For this reason, we suggest you avoid making bold moves based on what your emotions are telling you, regardless of whether you believe the latest tariffs will ultimately result in something good or something bad.
People have a variety of opinions regarding whether the U.S. is being treated fairly in regard to world trade, and whether we should even try to get things on a more level playing field. Many argue Trump could have also achieved these goals in a more civil manner, thereby preserving relationships with our strategic partners. Others argue that civility has not worked with past presidents, so why would it work now? Regardless of which camp you are in, I would not suggest making bold investment decisions based on this or any other politically charged headlines.
Although we may not all be able to agree on world trade and President Trump’s response to it, hopefully one thing that we can all agree on is that Sadie’s negotiating skills for a new backyard trampoline should be commended. Enjoy the rest of your summer!