What is a Tariff?

A tariff is a tax or duty collected on imports at the time of entry into a country. In its simplest sense, a tariff is a tax on foreign products that raises their prices and is paid by the consumers of the importing country.

Trump Levies Tariffs on Mexico, Canada, and China

President Donald Trump is wasting no time in implementing his tariff promises to his voters. Over the weekend, Trump announced that the US would levy a 25% tariff on goods from Mexico and Canada and a 10% tax on imports from China (effective Tuesday). In response, Canada has announced retaliatory tariffs on $30 billion in goods imported from the United States, further escalating the trade war.

What is Trump’s Plan with Tariffs?

Undoubtedly, the US has the most robust economy out of the nations involved in the trade dispute. That said, as US equity futures imply, tariffs can have a dampening impact on the country levying them in the short term. Which begs the question, “What are Trump’s tariff plans?”

Luckily, Trump has a long enough history in and out of public office to surmise what he may be up to. Trump even wrote a book titled, “The Art of the Deal” back in 1987, which laid out negotiating principles such as:

·       Leverage: Utilize what the other party needs to your advantage.

·       Be Willing to Walk Away: Trump believes that walking away from a bad deal can ultimately lead to a better deal in time.

·       Control the Narrative: Love him or hate him, Trump has an undeniable way of getting his message out through social media and combative press interactions.

In all likelihood, Trump and his team are using tariffs as a negotiating tool (not to earn more taxes) to attain more optimal trade deals (knowing that other countries rely on the US more economically than the US relies on them).

How Should Traders Handle Tariffs?

It remains to be seen whether Trump’s unconventional tariff plan will work, but in the meantime, investors must focus on handling the market as it lies. Currently, investors face an uncertain, news-driven market with the threat of “tape bombs” (or unexpected market drops). Below are five ways to handle the current market:

1.       Hedge Positions: Investors who want to stay the course and hold winning positions can use a hedge to weather short-term market volatility.

2.       Decrease Position Size: Another way to combat market volatility is to position size smaller. With smaller position sizes, investors can sit through larger price swings.

3.       Take a Tactile Approach: Experienced traders can switch to a nimbler, “hit-and-run” approach until the market provides more clarity regarding direction.

4.       Go to Cash: Unlike a Vegas poker table, investors are not forced to produce an ante (a required bet at the beginning of each hand). In other words, there is no penalty for moving to cash, and in some instances, traders can gain a better understanding of the market by spectating without hard-earned money at risk.

5.       Optimize your Portfolio Mix: During a trade war, inflationary/commodity adjacent assets are likely to outperform. For example, the Natural Gas ETF ((UNG Quick QuoteUNG - Free Report) ) and United States Oil Fund ((USO Quick QuoteUSO - Free Report) ) outperformed most assets Monday. Conversely, risk-on assets like the iShares Bitcoin ETF ((IBIT Quick QuoteIBIT - Free Report) ) and MicroStrategy ((MSTR Quick QuoteMSTR - Free Report) ) underperform. Finally, investors can also diversify geographically and enter Chinese stocks, such as Alibaba ((BABA Quick QuoteBABA - Free Report) ), for example.

Bottom Line

President Trump’s endgame with tariffs is to negotiate trade deals with trade partners. In the meantime, investors should expect volatility, “tape bombs,” and uncertainty.