The stock market has been jittery during the past couple weeks due to concerns about a potential trade war brewing between the United States and China. But how big of a deal is it really?
It remains to be seen how this could impact markets and the TSP funds going forward, but this article sheds some light on the current situation. As always, consider diversifying your investments in the Life Cycle funds and other asset classes.
The Trade Deficit
Ever since the 1980’s, the United States has had a widening trade deficit with the rest of the world, meaning that we import more goods than we export. Right now, the deficit is in the ballpark of $60 billion per month:
According to the Census Bureau, in 2017 the United States exported about $1.5 trillion of goods, imported about $2.3 trillion goods, and therefore had a global trade deficit of about $800 billion.
In the same year, the United States exported $130 billion of goods to China, imported $505 billion of goods from China, and therefore had a $375 billion trade deficit with that one country.
China constitutes almost half of the United States’ total trade deficit, and the figure has been growing in most years. The deficit between the two countries first reached $100 billion in 2002, $200 billion in 2005, $300 billion in 2012, and lately has been on a path towards $400 billion.
This is partly because many companies outsource their manufacturing to China. And as China becomes more developed and more expensive, companies have also been moving to Vietnam and other emerging regions in Asia.
To put it into perspective, the U.S. GDP is currently just shy of $20 trillion, so our total trade deficit of $800 billion represents about 4% of our economy, and our trade deficit with China is nearly 2% of our economy.
New Tariffs, Competing Interests
It’s rational for the U.S. government to want to reign in this trade deficit, especially if almost half of it is with one trade partner in particular.
It also makes sense for U.S. workers to want a lower trade deficit, because outsourcing is a way for companies to pay for cheaper labor abroad, which can push down wages and increase unemployment of American workers. At the same time, it makes sense that many companies would want to embrace globalization and outsource where it makes financial sense to do so, because from their perspective they can save money, supply goods at cheaper prices to American consumers, and stay competitive in a global economy. There are a lot of competing interests.
In 2018, the Trump administration began announcing and implementing tariffs on various imports. Here’s a summary of the major items so far:
• In late January 2018, the United States implemented 30% tariffs on imported solar panels, which will last for four years and decline by 5% per year. At the same time, tariffs were also implemented on imported washing machines.
• In early March 2018, the United States implemented 25% tariffs on imported steel and 10% tariffs on aluminum. Then in the middle of the month, Canada, Mexico, the European Union, and several other economic regions were temporarily excluded from the tariffs. China was not.
• In late March, the administration announced new tariffs on $50 billion worth of Chinese imports. The Dow Jones Industrial Average fell by 724 points; its fifth-largest daily decline in history.
• China announced 15-25% tariffs on over 100 American import items, and then a few days later announced additional tariffs on another 100+ imports.
• President Trump then proposed another round of tariffs on $100 billion of Chinese imports, although this round is not set in stone yet.
In addition to ever-increasing tariffs resulting in decreased American exports, a concern that some investors have is that China owns $1.2 trillion worth of U.S. treasuries, or over 5% of the United States federal debt. If China were to suddenly sell or stop buying these treasuries in retribution, it would likely result in higher interest rates for U.S. government debt and could shock the broader bond market. But doing so likely wouldn’t be in their interest either.
A Balanced Approach
The S&P 500 is about 10% off of its highs, and the forward price-to-earnings ratio is estimated to be around 16.4x according to JP Morgan. The recent market declines and volatility have let at least some of the steam off of high U.S. stock valuations, even though we’re still expensive by most metrics.
There’s certainly plenty of room for stock prices to fall if trade relations sour badly, but by holding a lifecycle fund or having exposure to all of the TSP funds, you can reduce the volatility of your portfolio and be ready for both good news or bad news in the markets.
See also, 2 Smart Methods to Preserve TSP Capital
I personally make sure to have exposure to U.S. stocks, international stocks, bonds, real estate, and precious metals at any given time.