Tariffs

As part of my advisory work a client of mine asked me what to make of all the talk on tariffs going on as part of the Trump administration. While it was outside the scope of my current work and not directly my area of expertise I did help her think through some of the scenarios and came up with some recommendations. 

Given how most of the things you read in this space seem to have a political tint I thought I will share my high level thoughts as you try to navigate this space in the coming quarters.

1. Tariffs are coming for sure to the US market. While there is talk of negotiations, the Trump administration strongly believes it is a valid mechanism to raise revenue and shore up domestic industries.
2. Given the US has a large deficit with all its largest trading partners (China, EU, Canada, Mexico, and UK) the ability of the US to utilize tariffs is strong given it is the country with the surplus who has more to lose in a tit-for-tat battle.
3. Given my analysis I do not expect tariffs to be uniformly kept in place after the dust settles down. So depending on where you business is one needs to consider different strategies:
   1. Mexico/Canada: I do not expect the tariffs with Mexico to be significant. The tariffs should be seen as a negotiation tool purely for political purposes. So in time I would expect these to settle into small amounts especially given the current Mexican government and the expected conservative Canadian government are like minded. 
   2. China: China is the country with the highest surplus. But, China by far is our most important trading partner. There are a lot of inter-dependencies which cannot be strategically untangled very easily. So while I would expect the 10% tariff increase to continue, this is the cost of business. I do not expect things to escalate.
   3. UK: I expect the UK to be drawn into the US orbit and become much more trade friendly to the US. Hence the threat of tariffs should be low as well. The UK can benefit as a midway house between Europe and the US. So investment in UK can be pretty sound.
   4. EU: EU is where I expect the tariff wars to really escalate. There are not really that many non-substitutable goods coming from the EU to the US. Additionally it is unlikely the EU given its political leadership is likely to play ball with the Trump administration. This is likely to result in significant tit-for-tat tariffs on each side.

In conclusion, my recommendation is if your business integration is anywhere but the EU I would not be overly concerned with the direction of the Trump tariffs. But if the EU is a major focus either as a supplier or as a customer you do need to start making contingency plans on tariff scenarios.  

Any commentary is welcomed, but do make it about business scenarios and not political statements.