September 3, 2024

How Tariffs, Trade Affect Manufacturing Investment

While protectionism appears popular in both political camps, its impact on US businesses and institutional investors is best viewed through a wide lens.

Reported by Bailey McCann

Art by Melinda Beck

Bipartisan agreement on any issue is hard to come by these days. But when it comes to tariffs and trade, a new consensus seems to be emerging in Congress.

Prior to 2016, both parties would have said that activities like raising tariffs or onshoring more parts of the supply chain would damage free trade and raise prices. Those views changed with President Donald Trump, who increased tariffs on a variety of goods in an attempt to curb China’s impact on the U.S. economy. President Joe Biden largely retained these policies and expanded the U.S.’s protectionist stance, with measures designed to support the U.S. industrial base by bringing more of the supply chain closer to shore.

While there has been a change in which candidates are on the ballot for 2024, the largely bipartisan support for higher tariffs and doing more to onshore the supply chain remains strong.

Trump, once again the Republican presidential nominee, has variously called for a flat 10% tariff on all U.S. imports, significantly higher tariffs on Chinese goods and replacing taxes with tariffs. Economic analysts have called these ideas bad for trade and bad for U.S. consumers. At the end of the Trump administration, economists for the Federal Reserve Bank of New York found that Trump’s tariff policies cost the average American household about $830 per year as businesses passed higher tariffs on to consumers in the form of higher prices.

Biden largely maintained the higher tariffs established during the Trump years and has added to them with the most recent round announced in May impacting $18 billion worth of goods imported to the US.

Vice President Kamala Harris, now the Democratic nominee for president, has not fully outlined how her administration would approach tariffs and trade. If she opts to maintain continuity with previous administrations, the U.S. will likely retain its recent protectionist stance, with the potential for some changes on the margin. Higher tariffs and increased investments in the U.S. industrial base are popular positions with organized labor—a key Democrat voting bloc—but some industry leaders have started to push back, as input costs remain elevated.

The U.S. is not alone on this. Canada recently announced a 100% tariff on Chinese electric vehicles, as automakers worldwide battle for market share. China also continues to implement export controls of key materials to maintain its position as top exporter of many critical goods.

What does this mean for investors?

Analysts and asset managers agree that these policies will impact large institutional portfolios in a variety of ways, but exactly how those impacts will play out is less clear. Higher tariffs can lead to higher prices for consumers, which can impact consumer spending and earnings growth for some companies. But those conditions can be offset by rising wages, for example, or growth in domestic manufacturing and improvements in supply chain reliability.

Equities Performance Likely Mixed

Cem Inal, CIO of U.S. large cap value equities for AllianceBernstein, says that trying to determine the impact of trade policy on portfolios in this environment can be challenging.

“We’re seeing a change in the world order,” he says. “Ten years ago, the focus was on getting the lowest possible price. That’s no longer the case. Now people are saying what about the security of the product? If something happens, we want to be able to get products into the country—into the stores.”

Making sure that there is availability and that supply chains are secure could mean companies need to reshore some parts of their operations. It could mean rethinking how they source materials or how they use energy. All of these decisions will impact input costs and potentially revenue growth. What’s more, while inflation has come down, it is still a higher-inflation environment on a relative basis. If companies run into difficulties passing through higher input costs in the form of price increases, that could impact how some equities perform.

Still, some industries may see improvements in performance as a result of incentives that go along with higher tariffs and other protectionist policies. The CHIPS and Science Act of 2022, for example, not only seeks to limit the use of Chinese companies and technologies in the semiconductor industry; it also provides federal funding and tax incentives to domestic technology companies to increase production of semiconductors onshore. “We’re already seeing U.S. companies benefit, and we expect that more manufacturing will come back to the U.S.,” Inal says.

The government announced on August 27 that it will give HP Inc. $50 million in direct federal funding to support its Oregon fabrication facility as a result of the CHIPS Act. The facility makes semiconductors and other components. Expansion of the facility is projected to create both construction jobs and technology jobs in the area.

Focus on Risk Management

Rather than trying to handicap sector performance, investors are likely to do better by focusing on risk management. Inal argued in a recent research note that looking for companies or industries able to withstand increases in tariffs or protectionism is a good first step.

Adam Filkin, managing director and head of consumer and retail for investment bank William Blair, agrees, saying downstream impact will likely tell you more than focusing on quarter-to-quarter performance.

“If you look at housing, for example, if we get a rate cut and more people start buying homes, that could lift consumer spending,” Filkin says. “Why? Because the first thing you do when you get a new house is go buy a bunch of stuff for the house.”

Filkin adds that tariffs may not have as big of an impact as initially thought, even on industries they are targeting.

“I was involved in a lot of transactions when President Trump first announced changes to his tariff policy, and in many cases, the bark was worse than the bite once we actually penciled it out,” Filkin says. “The point of a lot of this is deterrence and pushing for changes in behavior, and that can be achieved in many ways.”

Long-Term Trends

Trade and tariff policy also take a long time to play out. Filkin notes that it is still early in terms of understanding how this shift in stance on the part of world governments will ultimately impact the global economy. It is also unclear how consistent these policies will be if economies start to encounter new headwinds or consumers begin to push back significantly on pricing. AB’s Inal agrees.

“When we think about reinvesting in the U.S. industrial base, for example, we’re talking about very long-range investments,” he says. “We have been under-investing for decades. That’s going to take a long time to make up. If you look at reinvestment trends on a historical basis, those are cycles that can take a decade or more to fully materialize. That’s a large window of time for investors to take advantage of.”