What A Global Trade War Could Mean For You
By Todd Youngdahl, CFP®
In March, President Trump announced that he would begin imposing tariffs on steel and aluminum, sparking fears of a global trade war. Both the media and markets were up in arms over his announcement. But, why? What exactly is a trade war and what would it mean for the US economy and you, personally?
What Is A Trade War?
A trade war is defined as a situation in which countries try to damage each other’s trade. They do this by imposing tariffs or quota restrictions.
For example, country A decides to impose a tax, or tariff, on imports of cars from country B. This makes it more expensive for country B to sell their cars in country A. Country B thinks this is unfair, so they try to level the playing field by imposing a tariff on one of the products that they import from country A. And so it goes back and forth, with each country making it harder, or more expensive, for the other country to sell them their goods.
History Of Trade Wars
One of the biggest trade wars that the US participated in in recent history was started by the Smoot-Hawley Tariff Act of 1930. The act imposed steep tariffs on around 20,000 imported goods. In response, American trading partners imposed tariffs of their own. American exports dropped 61% from 1929 to 1933 before the act was repealed in 1934.
The general consensus among historians and economists is that the Tariff Act both deepened and prolonged the Great Depression. It also forged new trading relationships as countries turned away from the US to seek out better partners. Some of those relationships still persist today, such as that between Italy and Russia. There is also a strong argument that the trade war led to the rise of extremist governments, such as Nazi Germany.
In the early 1960’s, the US was involved in the “chicken wars,” as they were called, when France and Germany imposed tariffs on American chickens. The US responded with its own tariffs, but the Europeans never backed down. Overall, US policy has been to avoid trade wars, not wanting a repeat of what happened in the 1930’s.
Are We In A Trade War?
Fast forward to today, and President Trump’s steel and aluminum tariffs. His announcement alone led to a drop of 420 points for the Dow Jones Industrial Average. It fell almost 400 points again the following day as Wall Street decided to take the president seriously.
In retaliation, China imposed tariffs on around $3 billion worth of US imports. So, Trump threatened to impose more tariffs. We are not yet in a full trade war, but if all of the threats that are being exchanged are acted on, we will be.
How Might A Trade War Affect You?
What does that mean for you? For consumers, it means that prices will go up and options will go down. If a carmaker has to pay more for steel because of tariffs, they will pass at least some of the cost onto consumers, making cars more expensive. If quotas are enacted, there will be a limited supply of popular imports and consumers will have fewer options to choose from.
Investors are already feeling the effects of the current trade dispute in increased volatility. As we saw above, just the president’s initial announcement led to a drop in the Dow. His April announcement of a new $100 billion tariff plan led to a 2% drop in the S&P 500. Opinions on how the markets would respond to a trade war vary from neutral to extreme, so there is no real way of knowing what will happen. From what has happened so far, though, we can assume that investors should expect continued volatility, if not more serious issues.
If you have questions about trade wars or are concerned that your portfolio cannot handle the volatility that the current US-China trade spat has created, call our office at 703.584.2700 or email email@example.com. We would love to answer your questions and help you prepare for whatever it is the future has in store.
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