The White House came into March like a lion on trade. It announced stiff tariffs on steel and aluminum, followed by $60 billion in proposed tariffs on Chinese imports. So how nervous should we be about a trade war, you ask?
Well, the markets are certainly jittery. They responded to escalating trade tensions with their worst week in two years, taking a 1,400-point tumble last week. After a Monday rally, they’ve continued their retreat. Meanwhile, industry has responded with near-universal objection; forty-five different trade associations came together to urge the administration to abandon the tariffs, noting that they “would trigger a chain reaction of negative consequences for the U.S. economy.”
It all seems pretty dire, true, but in our present world it’s hard to separate bluster from reality. Many have noticed that the White House has established a pattern of backing off its tough talk on trade. The lion, it seems, is going out like a lamb–it has already granted wide exemptions on steel and aluminum, and then, after boasting that $60 billion in Chinese tariffs were the “first of many,” promptly entered negotiations to ease them.
The best gauge we may have on this trade war is not what 1600 Pennsylvania or Wall Street have to say to the media, but rather what public companies are telling their shareholders. Letters from trade associations designed to generate publicity are one thing, but you know a company has some level of true concern if it identifies tariffs as a risk to its business in its MD&A.
We checked our platform to take issuers’ collective temperature. A quick search revealed that in the last 60 days, 23 different public filings have mentioned both the current president and tariffs in their discussion of risk factors facing their businesses. The 10-Q of NCI Building Systems, a supplier to the non-residential construction industry, characterized its risk as follows:
On March 1, 2018, President Trump announced an intention to place a 25% tariff on imports of steel into the United States. Although the parameters and timing of any such tariff is not known as of the date of this filing, were such a tariff to be enacted it could result in both increased steel prices and a decreased available supply of steel. We may not be able to pass such price increases on to our customers and may not be able to secure adequate alternative sources of steel on a timely basis . . . .
In a recently-filed 20-F, Star Bulk Carriers said that “Political uncertainty and the rise of populist or nationalist political parties could have a material adverse effect on our revenue, profitability, and financial position.” CAI International, Inc., in a form 424B5, said that “[t]he recently implemented tariff on imported steel may impact the global market for steel, which could adversely affect our business . . . .”
Earnings calls, too, are instructive. Fedex Corp.’s Frederick Wallace Smith may have put it most amusingly. Faced with a question on trade protectionism, here’s what he said:
I’m reasonably certain everybody listening to this call has some sort of electronic device in your hand, a phone or an iPad of one sort or another. Go to your Google button, type in D-E-F, meaning definition, and then put in the word tariff or tariffs, T–A–R–I–F–F . . . . And what you’ll read in the Google dictionary there or wherever it is, tariff, a tax or duty to be paid on a particular class of imports or exports. So make no mistake about it, the great benefits that Alan talked about due to the tax reform bill to some degree will be offset by increased taxes due to tariffs.
The picture that comes together is not one of panic. But in their filings and calls, issuers are not dismissing the possibility of serious impact on their businesses, either. We may have to wait another earnings season to see where this lion–or lamb–goes.