Last week, President Trump, against the advice of almost every professional economist, announced substantial tariffs on almost every country in the world, thereby launching an economic war–a global trade war.
Whether your firm’s supply chain is being disrupted and demand for your products is falling, or your own your 401 (k) retirement fund is being shredded, or your household is struggling to make ends meet, you need to pay attention. There are 5 types of actions you should consider to have a chance of prevailing amid the inexorable chaos that is already engulfing the world.
1. See Through Significant Disinformation
You should realize that you are not alone in struggling to understand what is going on. President Trump’s announcement on April 2 contained substantial disinformation. At the most basic level, the president seems only occasionally aware that a tariff is a tax on the country imposing it, thereby creating an economic burden on the citizens of that country.
It is not true, as he alleged on April 2 that the U.S. is “a hollowed-out country with empty factories, unemployed workers and stagnant wages.” The fact is that over the last several decades U.S. has outperformed all its competitors and is now the dominant country in the world economy. As economist Fareed Zakaria notes:
- The U.S. economy has doubled in size since 2008, while the Euro zone has stagnated.
- US average wages are now roughly 40% greater than those of the other advanced economies, when it was only 20% greater in 1990.
- Today, American personal incomes are about 150 percent higher than Japanese personal incomes, while in 1995, Japanese personal incomes were 50% higher than those in the U.S.
- While U.S. manufacturing has declined in this century, owing principally to higher personal incomes, this has been more than compensated by the extraordinary growth of services through exporting software, movies, music, law, and banking.
2. Recognize The Risks Of A Trade War To Everyone
The last major trade war of the 1930s was accompanied by a 60% reduction in global trade. It was launched by President Herbert Hoover on June 17, 1930 with the passage of the Tariff Act, known as the Smoot–Hawley Tariff Act. It raised tariffs on over 20,000 imported goods in an effort to shield American industries from foreign competition. Most countries retaliated by raising their tariffs. Unemployment was 8% in 1930 when the Smoot–Hawley Act was passed but the new law failed to lower it. Unemployment jumped to 16% in 1931 and to 25% in 1932–1933. Overall, world trade decreased by two-thirds between 1929 and 1934 as the joint effect of the global trade war and limited money supply.
Given the disastrous history of prior trade wars, almost all economists gave multiple reasons why this new trade war is unlikely to succeed. The particular details of the trade war announced on Wednesday aggravated those concerns. The president gave multiple, inconsistent reasons for imposing unprecedented tariffs on several hundred countries, including countries that have no tariffs on U.S. products. The U.S. Secretary of Commerce has declared that the tariffs are permanent, while the President has indicated that the tariffs are negotiable. The Secretary of Finance has declared that he does not know whether the tariffs are negotiable or permanent.
China has already announced a retaliatory tariff of 34% on all U.S. imports into China. Other countries including Europe are also considering retaliatory tariffs. Stock markets around the world have continued to plunge since the announcement. Costs of all products in the U.S. are likely to rise significantly. Unemployment will rise. Inflation will increase.
The likelihood of the U.S. government reversing course in the coming months is low, and even if it did, a recovery would not be quick. Many analysts consider the likelihood of a global economic recession is now above 50%, for the reasons given in Figure 1.
These developments make it very difficult for individuals, firms and families to plan. It’s difficult to press ahead as if everything is normal, when we know it’s not.
With President Trump seeking to overturn decades of globalization and override the world’s trading rules, markets are in turmoil for good reason. You’d be foolish to think nothing has changed, and you can’t just wish the turbulence away.
Nothing like this trade war has happened in nearly a century. That means that most of us have no experience to rely on to put our minds at ease. That’s why thinking clearly right now is harder—but also more important—than ever.
3. Fix The Things That Needed Fixing Anyway
To prevail in times of his chaos, you must think clearly at a time when everyone is troubled. At the most basic level are decisions you can take now that you are unlikely to regret later. You need to fix things that needed fixing anyway. This might include
- In a firm, cutting activities and programs that needed cutting anyway.
- As an investor, it may be the right time to sell shares that you were going to sell anyway.
- In a family, you may wish to consider actions that would tighten your stretched family’s budget. Spending less and saving more will help you weather any market storm.
4. Look For Low-Risk Actions With long-term Positive Gain
While nothing is certain in the short term, some things are highly likely in the longer term. “Ultimately the costs of the tariffs will be recognized and they will be rescinded,” says Bryan Taylor, chief economist at Finaeon, a research firm in Irvine, Calif., that compiles and analyzes centuries of financial data. “When you look at the past,” he adds, “you see that eventually markets do recover, because over time logic prevails.”
- As an investor
- Consider taking your stock or fund dividends as cash rather than reinvesting in more shares.
- Move some money into international stocks or into bonds—particularly inflation-protected securities.
- Move your funds into firms that have a track record of positive long-term gains and out of firms with low long-term total returns.
- As a company,
- Seek exemptions or exceptions for your company if you have access to those with power to grant them.
- Stop any program that has low prospect of long-term success.
- Look for alternative supply chains to back up or replace existing sources of inputs.
- As a family:
- Consider whether this is the right time to undertake major expenditures such as a new car or an expensive vacation.
- Find lower cost alternatives that can enhance your family life.
5. Turn Extreme Disruption Into Major Gain
Once you have fixed the things that needed fixing and taken advantage of obvious opportunities, it may also be the time to consider the possibility of thinking as an entrepreneur. You should recognize that when everything and everyone is in disarray, this may be a time for cooler heads to make major gains.
If you stick to the two safe layers, you don’t have to be right about how Trump’s trade war will ultimately play out. In investing for retirement or looking after your family, it may not be the time to take major risk.
But in a business, the entrepreneurial way of looking at uncertainty is to try and find the big opportunities. At a time of massive disruption, everyone is looking for new answers. This may be the moment for your organization to provide them. If you can get out in front of the other people, you’ll recover faster and you’ may be able to become a big winner.
That’s especially true because anything can happen from here. Trust in the system of global trade has been shattered and will require pain and patience to repair. Inflation, recession or worse could result. But extraordinarily positive surprises could also materialize.
Thus, in a crisis, the needs of customers don’t go away. So if you can imagine new answers to meet those needs, you may make major gains. In short, “you engage in extreme thinking,” says Jonathan Treussard of Treussard Capital Management.
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