Update: On January 15, 2020 President Trump signed the first part of a trade deal with China. Under the terms of the deal, the U.S. will no longer label China as a currency manipulator and China will buy $200 billion worth of American products over the next two years. While tariffs on $250 billion worth of Chinese goods will remain in place for now, the United States canceled plans to further raise tariffs.
Trade wars can have real consequences, and their impact on markets and economies can be big.
In fact, markets in the U.S. continued to slide on Monday, May 13 as President Trump announced the U.S. will double tariffs on $200 billion worth of Chinese imports. China has responded by saying it will add new tariffs of its own on $60 billion of U.S. exports.
Read on and we’ll explain how trade wars can affect you and the economy.
So what’s a trade war?
Simply put, a trade war is when countries start waging an economic battle with each other using tariffs. One country will put tariffs on another’s goods, and the other will retaliate in kind.
A tariff, sometimes called a duty, is a tax imposed by one nation on another’s imports. (In some cases, tariffs can be “levied”–or placed–on exports.) The tariff is generally calculated as a percentage of the import’s total value, including freight and insurance charges.
Governments tend to impose tariffs on another’s goods to make their own products more competitive and affordable, and to generate revenues.
Until recently, the U.S. has generally refrained from increasing tariffs and entering into trade wars with other countries.
Trade wars and trade agreements
In fact, over the last 30 years, the U.S. has signed numerous trade treaties to avoid trade wars.
Agreements like this reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.
Trump reversed course in 2018, arguing such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete. Trump has said that products from China–in particular steel–have cost the U.S. millions of jobs, and have caused thousands of factories to close. Economists reportedly dispute these figures.
But it’s not just China. In fact, since last year the U.S. has imposed tariffs on a wide variety of overseas items, from countries as diverse as South Korea and Mexico, even Germany and France. And in response, numerous countries, including China, have imposed their own tariffs on U.S. exports.
Impact on the economy
- The trade war appears to be having a negative impact on U.S. farmers, according to reports that suggest the nation’s growers lost about $12 billion in the first quarter of 2019. Sales of soybeans to China were particularly hard hit.
- The U.S. spirits industry, producers of whiskey and other hard alcohol, have experienced declining exports not only to China, but to Europe, Canada, and Mexico, where new U.S. tariffs on products have also caused trade tensions, according to sources.
- U.S. consumers paid an estimated $12 billion in tariffs since 2018, according to reports. And they are experiencing higher prices on a wide range of items including dryers, lumber, cars, and clothing, shoes, and furniture, among others.
How trade wars affect markets
Sometimes the stock market can react to tariff wars.
That’s what happened this week, and also back in March 2018, when the Trump administration announced it would add new tariffs to foreign aluminum and steel. The stock market dropped last year at the prospect that goods and services could begin to cost more for consumers.
Similarly, uneasiness about whether the U.S. and China are coming to any agreements about trade have caused markets to swing throughout 2019. Not only does the U.S. import billions of dollars worth of products from China, U.S. companies export billions of dollars worth of goods to China.
Remember the Stash Way
Try not to pay too much attention to what happens to the stock market in the short run, as markets tend to be volatile, and move up and down. Trade wars can affect markets, but so can many other things.
That’s why Stash has boiled down its investing philosophy into a three-step strategy we call the Stash Way. It involves investing for the long term, regular investing, and diversification. You can learn more about the Stash Way here.