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How Import Tariffs Might Affect the Stock Market

Both supporters and critics of President Trump have noted that he’s an “unknown quantity.” It’s often been difficult to pin down No. 45’s positions on key issues. But one proposal he has never waffled on is his import tariff program.

Trump has repeatedly vowed to slap a double-digit tax on imports from China, Mexico and other industrial competitors of the United States. His protectionist trade agenda helped mobilize his working-class supporters, though it’s not so popular among financial experts.

What would an import tariff program do to the stock market? It’s hard to say for sure, but recent history gives us some examples. Let’s look at the potential positives and negatives for the market of Trump protectionism.

Stocks That Might Benefit From Import Tariffs

If you’ve been reading about the demographics of this election cycle, you’ve doubtlessly come across some articles about Trump’s working-class support base.

The president drew key support from blue-collar laborers with backgrounds in mining, metal refinery and other heavy industries. And there’s a good reason for that pattern.

Some of the biggest beneficiaries of import tariffs are companies that produce commodities like coal and steel. These raw materials are some of the biggest components of the international trade market. So the industries that produce them are very sensitive to the effects of cheap imports and trade policy.

For an example, look at the legendary United States Steel Corporation (NYSE: X). Long before Trump’s upset victory, U.S. Steel was on the frontlines of a steel trade war with China. Back in March, the U.S. levied a triple-digit import tariff on cheap Chinese steel. You can see how much it helped U.S. Steel stock in the graph below.

import tariffs 1

Needless to say, the stock also rocketed up on the morning of November 9. Heavy commodity-producing industries have a lot to gain from Trump’s protectionist agenda.

Stocks That Might Be Hurt by Import Tariffs

President Trump’s trade policy could be a boon for stocks that produce exportable commodities. But that might not do the U.S. economy much good if there are no container ships to carry those exports.

When we say “no container ships,” we’re obviously exaggerating. An import tariff program wouldn’t obliterate the shipping industry. But it certainly wouldn’t be good for it. Very few shipping firms make their money doing one-way voyages, so they could take a hit from reduced import activity.

An obvious example is Kansas City Southern (NYSE: KSU), a railroad-shipping firm that does most of its business moving cargo across the U.S.-Mexico border. Mexico is one of the countries that Trump has discussed as a good target for import tariffs.

If you look at Kansas City Southern’s stock performance between November 7 and November 9, it becomes clear that import tariffs are bad news for shipping stocks.

import tariffs 2

Import tariffs are not a new concept. But President Trump has proposed them on a scope that we’ve never seen in the 21st century. The market has been anxious about what this kind of protectionism might do to U.S. stock prices.

But in truth, it’s not that hard to guess. Just go long on “maker” stocks like U.S. Steel, and go short on “mover” stocks like Kansas City Southern. That way, you’ll be able to make big-league profits from import tariffs.

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