“I’m going to rip up those trade deals, and we’re going to make really good ones.” Absolutes like this were the norm on the stump for then-Presidential candidate Donald Trump. As it turns out, the words were not just rhetoric. Now, the economy and real estate markets must adjust to President Trump’s “America-first” trade mindset.
From bark to bite
Much of President Trump’s initial “bark” came through two executive orders signed in late-March 2017. The first focused on targeting countries accused of flooding American markets with below-market priced goods. The second gave the Commerce Department and U.S. trade representative 90 days to identify and report on the root causes of U.S. trade deficits.
While neither significantly moved the needle, they were symbolic of Trump’s deep-rooted beliefs on U.S. trade policy. And now, we are starting to see some “bite.” Almost a year after signing those orders, Trump announced a 25 percent tariff on imported steel and a 10 percent charge on imported aluminum. He then proclaimed a 25 percent tariff on Chinese imports like flat-screen televisions and aircraft batteries in early April. Wading through the bark and bite, uncertainty remains over a trade war and its impact on the economy and real estate.
Trade wars are typically born from tit-for-tat, where sweating the seemingly “small stuff” piles up. Trump’s measures are in response to the United States’ $566 billion trade deficit, the largest gap between imports and exports since 2008.1 These tariffs create an environment of winners and losers. And Trump seems to be telling the world economy, “Your move…” That move, from China or another trade partner, may stifle economic growth and hurt key trade relationships. China has already promised “firm and necessary” countermeasures, including potentially enacting tariffs for U.S. farm products like pork and soybeans.
And the next moves from the global economy may be just as jarring. If tariffs or trade taxes are pushed to the consumer, rising price inflation may put pressure on already-rising interest rates. Trade taxes also have historically restricted the free movement of labor and slowed net migration, which may have a trickle-down effect on labor costs. And, of course, any escalating tit-for-tat that weakens global growth may have a ripple effect on the U.S. economy and real estate markets.
Does the U.S. want a trade war?
The United States’ appetite for a trade war is small. It imports more goods than it exports, with its NAFTA partners (Mexico and Canada) and China making up 45 percent of the total trade activity in 2016.2
Its current trade obligations include 14 free trade agreements with 20 countries and the World Trade Organization. A June 2016 report published by the U.S. International Trade Commission assessed the positive economic effects of these trade agreements. Bilateral trade with partner countries has increased by 26.3 percent, U.S. exports have grown by 3.6 percent, and real gross domestic product has increased by $32.2 billion since their enactment.3 On balance, the economic impact and reliance on three main trade partners will likely deter the United States from engaging in an escalating trade war.
The potential impact on real estate
Trade raises the global economy’s overall productivity and wealth. NAFTA has been a core contributor to this growth, with bilateral trade tripling between the three partners since the agreement took effect in 1989.3 Any renegotiation of terms may impact the flow of trade, particularly among its biggest import benefactors.
NAFTA has also had a positive impact on truck traffic trade flowing between the United States and border countries. With the President’s desire for a southern border wall, any restrictions in this trade flow may hinder industrial real estate’s growing global supply chains. To adjust to a domestically focused supply chain, the U.S. would have to close many factories or re-purpose them, a significant investment of time and money.
Trump’s new tariffs may also hurt housing construction. While single-family homes are minimally impacted by steel and aluminum taxes, recent lumber tariffs from Canada ballooned costs by 15 percent, which increased median housing prices by $6,000-$10,000.4 New apartment and condo inventory, however, requires significantly more steel and aluminum, which could put even greater price pressures on new construction already trending higher-end.
In retail, a struggling brick-and-mortar presence may have difficulty absorbing any additional costs. Rising prices may come out of necessity, but it’s a difficult pill to swallow for an industry trying to adapt to new consumer demands. Ecommerce also may hit headwinds with any disruptions to intricate shipping supply chains.
The potential impact on investors
Any uncertainty or significant trade upheaval may lead to a period of market price dislocation. The S&P 500 fell 1.5 percent at the open of trading on April 4 and the CBOE Volatility Index – a key measure of near-term volatility expectations – doubled from its level for the last year in reaction to China’s retaliatory tariff threats. And while the markets started recovering as fears subsided, frayed nerves and continued trade uncertainty may continue to cause reactionary volatility.
With an actual trade war still relatively unlikely, fear may create investment opportunities, especially in industrial if robust fundamentals like low vacancies and strong rent growth continue. Value-add multifamily investments focused on cosmetic changes may experience less cost increases than new upscale supply coming online. Finally, even though retail is already trading at significant discounts, these headwinds may open investment avenues for shopping centers modernizing their experiences in locations with favorable core demographics.