What is a trade war and what does it mean for markets and for your investments?
A trade war is a conflict where one country imposes a tariff (extra tax) or quota on products (imports) of another (as US President Donald Trump has done with China) to protect its local industry. Tariffs on exports can happen but are rare.
The country on which tariffs have been imposed usually retaliates, imposing its own tariffs. As companies pay higher tax on goods, this is passed on to the consumer. Consumers don’t want to pay more and opt instead to buy cheaper local products (or that’s the intention).
In the case of US-imposed duties on steel imports, the Trump administration’s goal is to protect and prop up US steel manufacturers. They believe that, as steel imported from China becomes more expensive due to additional taxes, more businesses will turn to US steel. Trump has accused China of making cheap, excess steel available globally, making it impossible for US steel to compete.
A trade war will likely have unintended consequences, resulting in consumers being less likely to buy these products. The intention is that, in our example, US consumers opt for cheaper US products - boosting the country's economy.
Unfortunately, this does not always happen, and a trade war can result in slowing growth, job losses and businesses hamstrung by higher raw-material costs. If trade volumes globally decline, China’s huge manufacturing industry will shrink and demand for commodities exported from other countries to China will drop, impacting growth of countries globally. This is no good for anyone.
Fear of escalating trade wars causes uncertainty and investors do not like uncertainty. This means trade wars will weigh on stock markets, pushing share prices down and impacting an individual’s retirement fund/s. As far as your investments go, we suggest sticking to your long-term plan and not letting emotions and anxiety around current events derail it.
Written exclusively for Moore Stephens by Marco de Matos, Analyst at
Anchor Capital