Tariff Impact Beyond Steel


Within the last 6 trading days, the Dow Jones Industrial Average (Dow) has whipsawed over 1,323 points, which represents nearly 5.5% of its current value. The erratic behavior was the result of a wave of news, which has spooked investors.

While the controversy surrounding Facebook’s data breach is significant, investors appear to be fixated on the threat of an international trade war. Last Friday, the Dow dropped over 700 points when the President announced that China would be slapped with a 25% tariff on steel and 10% tariff on aluminum.

We were caught somewhat off guard by the market’s reaction to the tariff announcement, primarily because it wasn’t new news; the President has been telegraphing the tariffs for weeks.

So why did the market react so violently? Our theory is that many investors may not have taken the President at his word when the tariffs were initially announced. Often, the President’s negotiating style is to begin with an aggressive position and then compromise somewhere in the middle. That being the case, investors may have discounted the initial tariff pronouncement, expecting the U.S. to adopt a more measured approach to taxing imports. When that didn’t happen, the fear of a global trade war rattled the markets.

What also surprised us was that the steel companies have traded down. U.S. Steel (X), for example, was down nearly 11% last week, and is down almost 30% off its March high. That’s a strange occurrence considering domestic steel producers are supposed to be the beneficiaries of the tariffs. Why would investors sell on the news? Perhaps it’s because the exemptions granted to Canada and Europe muted the investor enthusiasm.

Still, the tariffs primary target is and has always been China. And while U.S. steel companies may very well benefit from import tariffs, that’s not necessarily the case for all U.S. multinational companies. If China were to retaliate in kind, that could significantly impact a number of U.S. companies that have significant exposure to China. Below is a list of just a few companies that that could be so affected, and the percentage of revenue they derive from China:

  1. 3M (MMM) (13%)
  2. Boeing (BA) (11%)
  3. Caterpillar (CAT) (9%)
  4. John Deere (DE) (8%)

To be sure, there are other multinational companies that derive a significant portion of their revenue from China – so this list is by no means exhaustive. However, what makes this cohort particularly relevant is that two of the largest Exchange Traded Funds (ETFs) that track the industrial sector have Boeing, Caterpillar, and 3M among their top ten holdings. Those ETFs, the XLI and the VIS, could be severely impacted if China follows through on their threat to retaliate against U.S. protectionism.

The flip side could also be true. If the President’s gambit works and China becomes a more responsible trading partner many U.S. companies, including those listed, would stand to benefit. And there is hope for a positive outcome – after the recent turmoil, China and the U.S. have discretely started to negotiate a solution that would improve U.S. access to Chinese markets.

In the mean time, until things get sorted out we expect market volatility to continue.


Sylva was not compensated by any of the companies mentioned in this article.

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Ross Silver is the CEO and founder of Sylva International. Mr. Silver is a Registered Investment Advisor with over 15 years experience in equity research, investment banking, and asset management. Mr. Silver served as a consultant for the National Institutes of Health and holds a Series 65 securities license.