- President Donald Trump imposed new tariffs on steel and aluminum imports this week.
- Vanguard economist Kevin Khang offers tips for investors to navigate this new environment.
- Along with disruptions, there are also opportunities for investors.
Vanguard economist Kevin Khang outlined three main points for investors on dealing with tariffs.
Since President Donald Trump took office in January, he has followed through on his campaign promises to raise tariffs. Last week he signed an executive order placing tariffs on Canada, Mexico and China. The proposed 25% tariffs on Canada and Mexico were delayed a month, but the 10% tariff on imports from China stood.
This week, Trump rolled out new tariffs, a 25% tariff on steel and aluminum imports across the board for all countries. But the impact will be most felt by Canada, Brazil and Mexico as they are the U.S.’s largest steel importers.
Stock markets have mostly reacted negatively to the tariff orders, at least initially, as they were trending lower again on Tuesday in early trading. But then they bounced back and were up slightly as the day wore on. It has certainly created uncertainty and confusion for some investors trying to navigate the budding trade war.
In a recent Q&A posted on Vanguard’s website, Vanguard senior international economist Kevin Khang put the latest round of tariffs in perspective and offered some tips on navigating the new environment. Along with the potential disruptions, there are also opportunities, said Khang.
Looking to History
In the Q&A, Khang said an initial step in understanding the potential impact of tariffs start with looking to the past. He cited two historical examples, both of which were quite different from one another.
In Trump’s first term, the tariff increases in 2018 were initially broad in scope and were aimed at many trading partners. However, over the next two years, there were many changes to those initial tariffs in the form of exemptions, escalations, and de-escalations, Khang said. Ultimately, the tariffs targeted primarily steel and aluminum, which Khang called a “more surgical and measured outcome than initial proposals suggested.” In those years, GDP growth was solid, ranging between 2.5% and 3%, not counting the pandemic year of 2020 when the economy shrank 2%.
The other example he cited was in 1930, when the Smoot-Hawley Tariff Act became law. This bill raised the effective tariff rate on imported goods to about 20%, with many trading partners retaliating with similar tariffs. Khang said this trade war likely worsened the Great Depression that was already underway. The Smoot-Hawley Tariff Act was repealed in 1934, but it shows how an adverse economic outcome can result from unsuccessful trade negotiations, Khang said.
“For long-term investors, this means understanding potential volatility that might arise as markets digest the impact of a highly fluid narrative on the future of the international trade landscape,” Khang said.
More Like 2018 Than 1930
When asked how markets are viewing tariffs this time around, Khang said the markets seem to be looking at how the 2018–2019 tariff negotiations evolved.
“I say that because until late on Friday, January 31, markets seemed not to have assumed that there would be immediate implementation of 25% tariffs on imports from Canada and Mexico,” Khang said. “On February 3, however, with the prospect of the tariffs looming large, large intraday movements suggested that markets were starting to aggressively price in the possibility.”
Initially, after the February 1 order, appreciated rapidly against the and , while market participants started pricing in a 2-year inflation expectation above 3%. Further, stocks experienced losses, with the shares of automobile manufacturers and homebuilders the most directly impacted by the proposed tariffs on Canada and Mexico.
But then, these trends largely reversed after negotiations with Canada and Mexico led to the tariffs being pushed off a month.
However, Khang cites these intraday movements for insights into how markets initially deemed that tariffs were unlikely to be implemented as initially outlined. And then they showed, albeit briefly, how markets may react if the new tariffs become far broader than those imposed in 2018–2019.
Tips and Opportunities for Investors
Khang outlined three main points on how investors should approach this environment. First, he said to expect volatility.
“Tariff negotiations are ongoing with multiple nations, which leads to uncertainty and fluidity, so volatility could quickly escalate depending on how things develop,” he said.
Second, to weather the bouts of volatility, investors should be broadly diversified, both across and within asset classes.
Third, Khang cited the potential advantage of actively managed portfolios.
“Outperformance in this type of policy-news-heavy environment may require good judgment in discerning signals from noise and an ability to tactically execute on opportunities that may be short-lived,” he said.
In the longer term, the Vanguard economist said the potential changes in the global trading ecosystem could offer disruptions and opportunities.
“For instance, supply chains have already evolved since the 2018–2019 tariffs, with China now accounting for much less of the market share for U.S. imports than before 2018,” Khang said. “These changes, though disruptive, can offer opportunities for new businesses positioned to take advantage and for astute active investors who can identify such businesses early on.”