Recently, the term “Trade War” has been used quite a bit among financial news outlets. With tensions growing between the United States and China, as well as other regions, the current trade war could have a long term affect on the market. The big question for many is, why?
What Is A Trade War?
A trade war is just what it sounds like. It’s a war faught with trade rather than guns. During trade wars, nations impose tariffs or quotas on imports. In return, other foreign countries lash back by imposing their own forms of trade protectionism. Ultimately, this leads to an escalation, reducing international trade and often harming economies.
Why Would Any Country Incite A Trade War?
Considering the damning economic affects of a trade war, it’s hard to imagine any reason that any country would want to incite a trade war. However, the reality is that there’s some good in these wars.
The truth of the matter is that trade wars are often started when one country wants to protect a particular industry or group of industries from international competition. For example, the trade war that is happening at the moment was started by the United States in an attempt to provide US companies with a competitive advantage.
Back on March 8, 2018, President Donald Trump announced a 25% tariff on steel imports and a 10% tariff on aluminum imports. These tariffs were imposed in an attempt to help United States basic materials companies gain an upper hand in the United States market. At the time, Trump was quoted as saying, “Trade wars are good, and easy to win.” However, that hasn’t necessarily been the case.
Since President Trump announced the tariffs, many countries have lashed back. It started with complaints made with the World Trade Organization by various countries. These countries included Canada, India, the EU, Mexico, Noraway, Switzerland, China and Russia. However, when these complaints didn’t get the complaintants anywhere, some of them enacted tariffs of their own.
Most notably, China has been very active in the trade war. In fact, since the issue began, China has imposed tariffs on billions of dollars worth of United States goods. These actions have been followed by Canada and others, ultimately leading to the trade war we see today.
How Do Trade Wars Affect The Market
At first glance, investors in the United States may think that a trade war is good for them. After all, the war is designed around giving companies in the United States an upper hand. However, the affect on the market isn’t always a positive one in the long term, and in this case, it could be overwhelmingly negative. The reason for this is relatively simple.
While the trade war was started to protect the United States companies and economy, it an inadvertantly lead to pain. After all, many US companies rely on compenents and materials made in China. By outsourcing these components and materials, cost is brought down dramatically, giving the companies the ability to offer their products to the end consumer at prices they are used to. However, as tariffs send the cost of components and materials upward, those costs must be sent down to the end consumer.
As a result, the trade war can actually lead to higher costs in the United States, not just for foreign goods, but for all goods. In some cases, the high rate of inflation caused by trade wars can lead to economic an economic recession.
The Bottom Line
While a trade war may seem like a great thing for the United States, the truth of the matter is that it is anything but. At the end of the day, the issue could lead to economic hardship, causing serious pain in the market!