The inevitable happened… China retaliated against the United States in the countries’ heated trade dispute.

On Wednesday, Beijing slapped $23 billion worth of tariffs on U.S. products, including soybeans, small passenger planes, and beef.

That comes three days after China placed 25% tariffs on 128 other U.S. products, like pork, wine, nuts, and seamless steel pipes.

The tariffs follow President Trump’s recent proposal to impose protective duties on up to $50 billion worth of Chinese imports.

China’s move is a shot across the bow. According to estimates, the tariffs will impact about $26 billion worth of goods.

That’s not much… But it’s sending a message.

For instance, California pistachio and almond growers exported over $1 billion in nuts to China in 2016. That could be in jeopardy now. And Wisconsin ginseng farmers could lose up to $30 million in sales to China.

Here’s the thing… This tit-for-tat could explode into a full-blown trade war.

Regular readers know that we don’t like tariffs… The market doesn’t, either. It plummeted over 2% on Monday after China announced its first threat.

This could get ugly really quickly… So now’s the time to start preparing your portfolio. If this trade war escalates, you’ll need to find a safer place for your investments.

In today’s essay, I’ll tell you one of my favorites. But first…

Tariffs Are Bad for the Global (and U.S.) Economy

As we’ve stated before, we’re not fans of trade barriers. In fact, trade is good for the world economy. Global trade has grown the world economy from $1.4 trillion in 1952 to more than $73 trillion today.

Global trade works because it allows countries to make win-win deals with each other.

For instance, Americans can buy relatively cheap avocados from Mexico while Mexicans can buy relatively cheap natural gas from U.S. shale oil fields.

Billions of people benefit from the low prices created by global trade. But tariffs make products more expensive.

Of course, global trade creates winners and losers…

And U.S. factory workers are among the biggest losers right now. That’s just how the global economy works.

China pays its factory workers less. That means Chinese-manufactured goods are cheaper than U.S.-manufactured goods. That’s good for U.S. consumers.

We understand… Many Americans want to protect domestic jobs. But that comes at a cost: higher prices and even more job losses.

Companies will add the costs of any tariffs to the prices of their products, so it’s like a hidden tax. Plus, tariffs can be job killers.

For instance, when President Bush imposed tariffs on imported steel in 2002, the steel industry gained 3,500 jobs. But industries that used steel lost about 200,000 jobs.

And according to one study, when President Obama placed tariffs on Chinese tires in 2009, it saved 1,200 jobs. But China responded with tariffs against U.S. retailers, costing 3,000 jobs. So, it was a net loss.

As you can see, tariffs cause more harm than good…

That’s why the Dow Jones Industrial Average and the S&P 500 indexes are down 12% and 10%, respectively.

Despite the market plunge, Trump isn’t folding. In fact, he’s upping the stakes. And China’s not backing down, either. That’s why you need to act now…

Raising the Stakes

Even before Beijing announced its retaliatory moves, President Trump asked his team for ways to penalize China even more.

The Trump administration is considering billions more in tariffs on Chinese high-tech sectors like semiconductors (chip makers), communications, and aerospace.

That would push prices for electronics a lot higher… and the broad market a lot lower.

Today, the S&P 500 looks shaky. That’s because it’s mostly made up of large, multinational companies. They will feel the brunt of any trade war.

Small, domestic companies are less exposed to tariffs. So, they should fare better if things heat up.

You can see that in the chart below. It compares the iShares Russell 2000 ETF (IWM) to the SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF (SPY).

The Russell 2000—which tracks small U.S. companies—is only down 8% since the end of January. That’s much less than the Dow and the S&P 500.

If a trade war escalates, small caps will outperform multinationals.

The easiest way to gain exposure to the Russell 2000 is through IWM. It’s one of the safest places to hang out right now.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

MAILBAG

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