- The Trump administration's tariffs are the latest sign that globalization is waning.
- Globalization has been benign for investors. Changing the rules of the game could present challenges for corporate profits, economic growth, and inflation.
- The key area to watch is the Trump administration's economic policy with China.
- With policy risk increasing, it's not a good time to deviate in big ways from your long-term asset allocation.
The Trump administration recently slapped tariffs on Mexico, Canada, and EU countries, and threatened tariffs for China. Viewpoints checked in with Dirk Hofschire, Fidelity's senior vice president for asset allocation research, to ask what these developments mean for investors. He said they're an important sign of a larger trend away from globalization—and that trend and other risks make this a bad time for big bets in a portfolio.
What do investors need to know about all the recent tariff talk?
Hofschire: I tend to think less about tariffs in isolation and more about globalization more generally. The world has been in a general trend toward greater globalization for the past 30 years or so, which has been highly facilitative of global trade, capital flows, global supply chains, and the mobility of labor. That trend has begun to flatten out and perhaps even start to erode over the last several years. For investors, the question is what happens if the rules of the game are starting to change. Tariffs are just one piece of that larger context.
Why does a decline in globalization concern investors?
Hofschire: The countries and companies that hold large weights in global indices have all been beneficiaries of this globalized system. Consider the large, multinational companies that dominate the S&P 500 Index: These entities and their investors have profited from this rules-based global regime.
The global regime has been very benign from investors' standpoint, because it is free-market-oriented, based on sound economic principles, and good for corporate profits. Companies could sell into markets around the world and have access to less-expensive labor. The US served as the primary architect of this model, with other advanced economies of the world, like Europe and Japan, joining in, followed by emerging markets like China, Russia, and others.
But no matter how you measure it, globalization has peaked out. The engines that were making the world more and more integrated have started to lose steam. And since the global financial crisis, the countries that set up the architecture for the global system have become less enthusiastic about defending and enforcing it. We can see that playing out in domestic political pressures: For example, openness to new trade agreements is waning. This trend didn't begin with the Trump administration; it has been evident for some time on both sides of the political spectrum.
Globalization has been very effective in generating wealth and human progress on a global scale, but there are downsides to it. In the US, the bulk of the financial gains have been enjoyed by the top income stratum of the population, while median wages and workers have stagnated, creating greater economic inequality and insecurity.
Meanwhile, we've seen the rise of China, which did not build the global architecture and has a different economic and political system and a different worldview. The Chinese are promoting an alternate model that's in direct contrast to the rules-based multilateral system we’ve lived under.
All these changes throw some sand in the wheels of the well-oiled global machine. The possibility of shifting to a different type of system presents the risk of disrupting global supply lines and profits, which could lead to lower profit margins and less investor confidence.
How do tariffs fit into the picture?
Hofschire: From a macroeconomic perspective, tariffs could have a stagflationary effect. Disrupting supply chains and casting uncertainty over the rules of the game tend to discourage corporate investment, which is not good for growth. And tariffs are inflationary. When you tax an imported good like steel, the tax gets passed along in the form of higher prices. So tariffs put a bit of a dark cloud over the growth forecast and give a bit of a boost to the inflation forecast. They increase the likelihood of stagflation, which is the worst-case scenario for a multi-asset-class portfolio.
Could there be any winners from an investment perspective?
Hofschire: On a relative basis, yes. The relative winners would be companies that are less exposed to whatever sector the tariff is affecting. If we're talking about steel, companies that don’t have to import steel could be winners relative to those that do.
From a broader perspective, the outlook becomes more negative in an absolute sense: The more impediments to the mobility of goods, capital and labor move out of contained single sectors, and the more people start wondering about uncertainty across wide swaths of the economy—for example, if people start worrying about the impacts on sectors like automobiles or technology that have clear global supply chains integrated throughout the world in multiple regions—the companies and the countries that are more domestically oriented generally are going to hold up better.
What developments will you be watching most closely?
Hofschire: I think the key thing to watch is how the administration deals with China. China is the second largest economy in the world and is very strongly integrated with the US economy in terms of trade flows.
Calling China out on its allegedly unfair trade, investment, and other economic practices is partly motivated by security concerns. China's 2025 plan intends to subsidize "national champion" companies in the next generation of industries, including many industries with military applications such as robotics, semiconductors, and aerospace. The concern is that if China continues to steal intellectual property or force the transfer of intellectual property in technology, over time it could translate into a military advantage. I'm watching to see if the US administration will follow through with its threats—in particular, with this first round of $50 billion in tariffs. We’ll see if the administration is using tariffs as a negotiating tactic, and if we’ll ultimately accept some assurances from China that it will buy more US energy, agriculture, and other exports.
The next month will be interesting, with a lot of bilateral negotiations between China and the US. The Trump administration has set June 15 as the date it will announce the specifics of the first round of tariffs. I'm watching to see if a deal emerges that softens some of the confrontation. I don't expect a breakthrough that makes all of this go away. In the near term, the real question is whether the administration is going to ratchet up the pressure in the form of tariffs. In that case, I think it's likely that China would retaliate, which could possibly lead the US to retaliate again. That would be cause for concern.
What should individual investors do to protect themselves?
Hofschire: Individual investors should invest for the long term. Build a strategic portfolio that's defined by your risk tolerance and long-term goals like retirement.
What we try to do is to think about near-term developments like these and how they affect the ways we might tilt our positioning one way or another. We think the US is in a mature phase of the business cycle. Risk factors tend to accumulate as we move later in the cycle, and right now, policy risk is one of those accumulating risk factors. On the margins, this dynamic makes us a little more cautious. We think this is a time to avoid taking very large cyclical overweight positions in any investment categories: It's a time to stick with your long-term, diversified portfolio strategy. We've had a really nice run in the markets, and trade is just one of the many factors that potentially presents a bit more downside than upside right now.
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