Talking Tariffs with Director of Research James Bailey, CFA

How do you think about the continually shifting trade tensions?

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A country’s balance of trade, either a deficit or a surplus, is an economic statistic of limited value because it does not account for exports of services or profit and loss from trade and foreign investment. If the shifting trade policies persist, serious problems will emerge, and the outlook for most financial assets will be poor.

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To illustrate the limitations of the trade deficit calculation and how it can be misleading, consider the iPhone. Apple sources components worldwide, assembles them in China, and imports the finished phone into the U.S. This trade, in isolation, creates a U.S. deficit with China. However, it ignores all the benefits to the U.S. economy, including services, productivity, associated economic activity in the U.S., exports of the iPhone to other countries, Apple’s profits and the creation of shareholder wealth.

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We are watching the inter-cabinet rivalry between Lutnick’s Commerce Department and Bessent’s Treasury Department for hints on the future. We believe Bessent seeks to promote “fairer trade” by negotiating away one-sided trade barriers against U.S. companies while keeping the decades-old global supply chains that have immensely benefited the global economy, especially the U.S., largely intact. Lutnick seeks a major restructuring, where supply chains are “reshored” to the U.S., including many low-value goods that the U.S. doesn’t have a comparative advantage in producing. While Bessent’s policy ultimately might be helpful, Lutnick’s approach would likely produce stagflation and significantly reduce America’s competitive advantages.

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How is the uncertainty informing the positioning of Torray’s portfolios?

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Our response to Trump 1.0 was to proactively shift our portfolios towards businesses with more economic exposure to the U.S. and less to China. Management teams of many portfolio companies shared similar views and began adjusting their supply chains for this risk. For example, one of our holdings, Switzerland-based Lonza (LZAGY), bought one of the world’s largest biotech manufacturing facilities north of San Francisco in 2024. Our rationale was that the U.S. economy likely offered the best environment for stable growth while China faced emerging problems.

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At that time, we also initiated a research process to understand each investment’s exposure to trade vulnerabilities, which led us to sell or reduce the weights of several holdings. New buys and weight increases were also evaluated using this new tool. We have since expanded our trade vulnerability analysis and are proactively using Trump 2.0-induced volatility to improve the portfolios’ long-term growth profile without reintroducing the trade risks we reduced.

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Our exposure to semiconductors does not follow this geographic shift. In our view, no sector has benefited more from global free trade. Today’s chips are more powerful and cheaper as a result. As with all our holdings, we seek semiconductor companies well-positioned to handle challenging environments. We believe the secular trends supporting semiconductors merit accepting the trade uncertainty risk. To learn more about the global impact of semiconductors, we recommend the book Chip Wars by Chris Miller.

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What risks are keeping you awake at night?

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The existence of a global free market in which ‘winning’ is shared among many peaceful nations is a fragile, ahistorical idea. Great economic thinkers like Adam Smith and Milton Friedman advanced the concept, and it has been the dominant model for the world’s major economies since the conclusion of the Second World War. The resulting success has broken historical precedents, with billions of people emerging from poverty and trillions of dollars of wealth created and shared. My biggest concern is that these current trade tensions accelerate into a long-term retreat to the winner-take-all world of the past.

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There are lots of events that could push this retreat. I could be wrong about how much Bessent’s fairer trade approach will influence Trump vs. the reshoring restructuring advocated by Lutnick. U.S. trading partners could impose damaging new tariffs and barriers on U.S. companies. Highly specialized global supply chains might no longer be accessible, especially in critical semiconductor markets. Foreigners could also reduce their purchase of U.S. Treasury bonds, raising interest rates to dangerous levels. Free trade tends to support peace, so we will get a more dangerous world if trade tensions get bad enough.

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Disclosures

This commentary is for informational purposes only and should not be viewed as a recommendation to buy or sell any security. There is no guarantee that the views expressed will come to pass. Torray Investment Partners LLC is an independent registered investment adviser. Registration of an investment adviser does not imply any level of skill of training. Past performance is not indicative of future results. For additional information about Torray Investment Partners LLC, including fees and services, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). As of 03.31.2025 Lonza Group AG accounted for 3.8% of the Concentrated Large Growth strategy. Holdings are subject to change and should not be considered a recommendation to buy or sell any security.