Trade War 101

Jul 23, 2018 | Investor Education

We’re hearing a lot of talk these days about a trade war, and with that has come a lot of questions: Are we in one? With who? What impact will it have? And what does a trade war even mean?

These are all valid questions, and we created this guide to walk you through everything you need to know about the trade war — starting with the basics.

What is a trade war?

By definition, a trade war occurs when two countries try to damage each other’s trade. It unfolds when one or more countries retaliate against another country for actions that negatively impact trade — typically tariffs (a tax on imported goods or services) or quotas. It’s like a grownup version of a schoolyard fight: One country pushes another country, and then that country pushes back.

What does that look like in real life? Over the past few months, something like this: The U.S. decided to raise tariffs on $34 billion worth of China’s imports of U.S. goods, and China struck back, raising tariffs on $34 billion worth of U.S. imports of Chinese goods.

Sounds a bit like a tit-for-tat, right? It is. And in a trade war, it escalates until one side decides to back down.

How did talk of a trade war start?

President Trump has expressed serious concern over our country’s trade deficit, which shows that the U.S. imports more than it exports. A trade war is his solution. In one of his trademark tweets back in March, the president said: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”

So he’s taken aim at the European Union, Mexico, Canada and China, as well as the North American Free Trade Agreement (which he wants renegotiated) and the Trans-Pacific Partnership (which he has pulled out of).

The tariffs — Trump’s key tactic in the trade war — began back in January, when the U.S. imposed them on imported washing machines and solar panels. But the boldest moves happened this month, when the $34 billion in U.S. tariffs on Chinese goods took effect.

China responded in kind, imposing a matching set of tariffs on $34 billion worth of U.S. imports into the country.

Tit for tat.

Are we in a trade war now?

It depends who you ask, but technically, yes. Tariffs have been imposed, and retaliation has occurred — and so, by definition, a trade war has begun.

Where experts disagree is on the level of intensity. Is this really a trade “war” or more of a trade “spat”? We likely won’t know the full impact until 2019, when the tariffs will be fully implemented, and much can happen between now and then.

What’s the potential benefit to the U.S. in all this?

The U.S. has focused much of its tariffs on steel and aluminum, in the hopes that as steel and aluminum imports become more expensive, more businesses will buy American. That could benefit American steel and aluminum manufacturers.

At the same time, those tariffs could hurt other American manufacturers that rely on steel and aluminum — think automakers like Ford and General Motors. Those manufacturers could choose to pass the increased price of steel and aluminum on to consumers, creating higher costs across the board.

What other risks are involved in a trade war?

Earlier this month, Jerome Powell, chairman of the Federal Reserve, told lawmakers that the trade war had already stunted economic growth, with some U.S. businesses abandoning plans for expansion because of rising costs and growing uncertainty.

“In general, countries that have remained open to trade, that haven’t erected barriers — including tariffs — have grown faster. They’ve had higher incomes. They’ve had higher productivity,” Powell said. “And countries that have gone in a more protectionist direction have done worse.”

Needless to say, an economic slowdown is the last thing we want right now.

Why is China important?

Although China isn’t the only country impacted by the trade war, it’s getting the lion’s share of the attention — for a few key reasons.

First, President Trump claims China has filled the global market with cheap, excess steel, making it impossible for American steel companies to compete. There is some question over whether the American steel industry could accommodate a surge in demand, but the president wants to at least give them a shot.

There are also allegations that China has been stealing U.S. intellectual property — a blanket charge that includes everything from counterfeiting famous brands to stealing trade secrets to pressuring companies to share technology with Chinese companies. The trade war could be considered partly the result of President Trump’s hatred of the trade deficit and part punishment for China’s alleged bad behavior.

Why are other countries upset?

For one, there’s the potential negative economic impact. But on top of that, there’s a bigger question about how the trade war came to pass.

Typically, World Trade Organization rules prohibit the imposition of tariffs in the way the U.S. has pursued them. But President Trump circumvented those rules by claiming that steel and aluminum imports are a threat to national security. It’s a loophole, and critics worry that, by exploiting it, the U.S. has set a dangerous precedent — one that could disrupt the whole global trading system.

Where does the trade war stand now?

You know the $34 billion in tariffs the U.S. has levied against China? There’s about $200 billion more where that came from.

That new round of tariffs will include everything from fruits and vegetables to handbags, refrigerators, rain jackets and baseball gloves.

China has already said it will respond with “necessary countermeasures” — although it hasn’t specified what that will be.

What does all this mean for me?

The stock market has been sensitive to how the trade war has unfolded, but the good news is, any market variations have leveled out relatively quickly. As the tit-for-tat escalates — along with political tensions — we’ll be keeping a close watch on the shifting economic climate. Other countries have threatened retaliation if the U.S. imposes tariffs on them, and that could turn this relatively cold war into a hot one — fast.

As always, we’ll keep you up to date as the news unfolds so you can make the most informed choices when it comes to your investments. While talk of steel and aluminum tariffs may feel like it’s happening a world away, we live in a deeply interconnected world. It all matters, in one way or another, and your best offense is to stay informed.

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To learn more about DreamWork Financial Group and our Fee-Only Wealth Management model, visit our website and schedule a meeting with our Chief Financial Strategist, Clint Kirby and be sure to sign up for our free monthly newsletter. Also, be sure to check out our archived newsletters, bold predictions and other articles in our knowledge base.

Warm Regards,

Clint Kirby Chief Financial Strategist at DreamWork Financial

Clint Kirby - Chief Financial Strategist

DreamWork Financial Group

Clint Kirby, DreamWork Financial Group is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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