April 2025 Newsletter
US Tariffs and Sharemarket Movements
What is going on and what to do?
Hello, there is much happening in the world at the moment with a lot of talk about the introduction this week of what President Donald Trump in the USA calls reciprocal tariffs.
Some might be wondering what does this all mean, what to do and why has the US sharemarket dropped substantially for two days in a row?
The first step in knowing what to do is to have an understanding of what is happening:
Donald Trump has increased tariffs on pretty much every country in the world. The exceptions are countries where sanctions already stopped most trade such as Russia or Belarus.
What is a tariff?
A tariff means that when, for example, an American buys a foreign car, the US government collects a percentage of the landed value of the car as a tax. If the tariff is 34%, then the government would charge the importer $34,000 on a $100,000 car. This means the consumer then pays $134,000, rather than $100,000 and may well prefer to buy the $110,000 local car instead. I chose the numbers for simplicity, not realism as most cars are cheaper than that but the logic applies to all cars.
Large tariffs are bad news for a lot of people and for trade and the world had bad experiences with tariffs in the 1930s as everybody closed their borders to trade after the 1929 market crash.
So why is the USA government implementing these tariffs, including, currently a 58.4% tariff on their huge trading partner, China?
The United States has run for some 50 years a large trade deficit with the rest of the world. This means the United States purchased far more from the world than sold to the world. The world in return bought huge number of US assets, which means that the US as a whole had more and more debts and owned fewer and fewer assets.
A number of countries that run large trade surpluses since World War II simply enriched their citizens. Examples are Germany, Japan and Switzerland. Over time these surpluses are reducing because these richer countries spend the money in ways that make them lose competitiveness. Japan is aging rapidly, i.e. not replenishing their workers, Germany has a huge welfare state and is currently deindustrialising, likely destroying their competitive advantage. Switzerland is doing fine so far.
However, China and Vietnam and other countries with a large trade surplus to the world have taken a different path. They enriched their people to a certain degree but used much of the generated wealth for other purposes such as favouring state-owned companies or excessive infrastructure and other priorities. This means that the trade surpluses persisted as their underpaid workers are more competitive than US workers and they acquired many skills in manufacturing that the US lost.
The effect was that the rich got much richer over the last 30 years in the US as they owned the companies that profited from moving to China and Vietnam, while the middle class stagnated and large numbers of Americans fell into poverty, becoming more and more dependent on government handouts.
An example is Rockwell, an American tech conglomerate that moved their factories to Mexico. As their factories are quite high-tech, they only saved about 10% in costs, while apparel makers saved much more for example, but Rockwell fired a large percentage of their US workforce for that small cost reduction. Trump almost nullified that advantage by putting a 7.8% tariff on goods from Mexico.
That is a neat little story but it goes some way to explain why Trump chose widely varying tariffs and how those tariffs were calculated. There are differing tariff numbers circulating at present, calculated in different ways so the numbers we quote are indicative only from the most reliable current source we could find.
One popular rumour is that the tariffs were calculated in a similar way to this example: If country ABC exported $100 billion to the US and the US exported $2 billion to ABC, then the USA says that 98% of the trade ($98 billion of $100 billion) is in deficit. Divide the 98% by two, round to 50% and you have the tariff.
There are also other reasons and purposes for the way tariffs are being used, which we can’t cover here as the newsletter would become too long!
Please Note: Many of us have very strong opinions when it comes to actions by Donald Trump. In this newsletter commentary we intend to discuss the history and economics of the situation. It is not a political comment or opinion on any people or parties mentioned – we understand it is a sensitive issue for many people.
The US market fell on Thursday, April 3rd due to the markets reaction to the tariffs and then again on Friday, April 4th as China and others replied belligerently.
On the other hand, Vietnam contacted Trump and offered to drop all of its tariffs in return for a reduction of tariffs from Trump and Trump made very positive noises. If there is a quick resolution with Vietnam, others may follow.
Where this will go is unknown and there are quite a few pathways possible, from a global trade war, to a partial trade war, to a relatively quick agreement.
If one of the better scenarios eventuates, then the US would become again a manufacturing powerhouse, China and Vietnam would concentrate much harder on increasing demand in their own countries by increasing wages – a strategy that Singapore very successfully employed in the past. There would be substantial realignment but a Chinese factory owner would be just as happy to sell to Chinese customers as to US customers.
Many manufacturing jobs in the US would mean a much stronger middle class and a more equal society.
Another way of looking at the bright side is by saying that sooner or later an impoverished America would be forced to reduce the amount they purchased abroad anyway and there is a benefit in reducing that imbalance now, while the US is still reasonably wealthy.
There are many other, seemingly unrelated uncertainties and opportunities in the market. For example, Tesla expects to sell humanoid robots in large numbers starting at US$30,000 from 2027. These robots will be quite smart with hands that are almost as good in many ways as human hands (they currently have 22 degrees of freedom vs a human hand’s 27 degrees of freedom). That means they can mow your lawn, cook, clean, offer a huge number of aged care services allowing people to stay in their homes longer, staff factories next to human workers etc.
Also, artificial intelligence is moving ahead in leaps and bounds and is getting much, much cheaper to deploy. Whether that leads to increased wealth or increased regulations or both, as happened with computers, we don’t know.
What to do as an investor?
With all these changes and dangers, what do we do?
Firstly, if you are a client of ours, the Australian market has so far dropped much less than the US market as we are less affected with only a 12.8% tariff and an agreement with the US would be quite easy to arrange. That is helpful as much of your investments would be in Australian shares with dividends and the benefit of franking credits, and less in international shares.
Nobody knows which companies are going to be winners and losers, hence using index funds that cover much of the market are easier to sustain than trying to choose particular companies where the losses could be large.
This is very much a struggle between an old, unsustainable world order and a new world order where Trump was elected by the workers and poorer parts of America and is therefore implementing policies that support these Americans.
The old world order is still very powerful with a substantial majority of US parliamentarians receiving large donations from companies profiting from the old world order and the nations behaving belligerently counting on those parliamentarians to force Trump to back down. On the other hand, the voters of a majority of those parliamentarians are in favour of Trump’s policies, so there are a lot of moving parts.
In times like these of great uncertainty, investors are most of the time paid to hold their nerve. One big problem when selling out and moving into cash is when to go back in as there are quite a few scenarios where going out of the market and then going back in is worse than doing nothing.
For example, there are so-called bear traps (a bear in sharemarket parlance is a person who thinks that the market will fall or is betting on the market falling) where the market goes down, as it just did, the bear sells, the market goes down further but then spikes sharply upwards for days or weeks.
What will the bear do? If what happened next was like during the Covid crash in March 2020 where the market quickly retraced its steps, the bear will lose as they will pay more than they sold for and they lost out on dividends in the meantime.
If the scenario is like it was in 2008 and early 2009, with sharp upward spikes followed by even bigger downward spikes until March 2009 where the market then went up 40% within seven months, the bear may buy during the upward spike, sell during the downward spike, losing money each time. In such a case the bear would need to hold their nerve, just like a buy-and-hold investor, in order not to buy into the market until it reaches the bottom.
Then the bear needs to identify the bottom or it will miss out on many of the big gains.
In other words, a bear needs the right market developments, nerves of steel and the ability to spot a true bottom. In practice, pretty much nobody has these qualifications. A person who does nothing, i.e. engages in masterful inactivity, will have their wealth reduced, but, so far, the market has always come back and the investor will collect dividends throughout.
For a deeper explanation, this is a long tweet from a journalist with exceptional insight:
As always if you have any questions about this or any other matter we are here to support you.
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Warm regards,
Christoph and Team:
Nicola, Marian, Deryk, Ann-Marie, Alvin, Lin, Yvonne and Michael.
Dr Christoph Schnelle
Financial Adviser and Life Insurance Specialist
In Your Interest Financial Planning
t: 1800 332 225
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