09 Apr 2018

Trade Wars? Give Trade Peace a Chance.

April 9, 2018

Last month the president announced tariffs on steel and aluminum, and this caught the markets by surprise (and it’s wasn’t the good kind of surprise). Let’s take a look at what’s going on, why trade wars are bad, why the markets reacted so negatively, and what may come.

What Happened

Tariffs, one of the weapons of a trade war, are a tax on imports. The idea is to support companies perceived as victims of global trade issues. Most economists view these as bad for free markets because they distort prices, artificially support some industries, and can have major unintended consequences.

The tariffs on steel and aluminum (and about 1,300 other products) were largely aimed at China, and China didn’t appreciate these tariffs at all. So as with any war, the country that was attacked responded in kind with a list of new tariffs. A big threat that got attention was soybeans. China consumes a lot of US soy beans (think tofu), so now US farming, which was minding it’s own business, is suddenly pulled into the fray. A recent NY Times article points out that the goal is probably an attempt to hit the administration in “red states.”

Without going into the weeds on economics we can quickly see how this begins to play out, including real impacts to average consumers who buy products, and business owners like farmers. As we’ve seen before the markets hate uncertainty, and this has created a lot of uncertainty.

The Markets Don’t Like This

The price of a stock represents it’s future value, always looking forward. The point where sellers are willing to sell and buyers are willing to buy is the stock price we see quoted. There are a lot of assumptions baked into these prices.

When the price of a basic item like steel comes into play, it’s very hard to predict how it will impact lots of companies. US companies that make raw steel may be OK, or even do quite well. US companies that buy steel in the global market to make things will feel pain, and consumers may end up paying more for finished products. When you spread that kind of thinking across all companies that just use steel it’s hard to justify the current stock price and hard to figure out what the new price should be.

This is what spooked the markets, and caused the animal instinct to sell, and push prices down until there is more information. This example was just steel, so the same thinking would apply to aluminum, soy beans, and every other item in play. So now we’re affecting the price of stocks, products, and things that impact the broader economy like disposable income, employment, etc.

This leaves us with much uncertainty and helps paint the picture of why trade wars are bad.

A Hope for Peace

While the steel and aluminum tariffs are already in place, the new lists remain only threats. There is an opportunity to negotiate and take a giant step back. A recent article in The Economist points out that the US stepped away from tariffs on European steel when a retaliation was threated on oranges, among other things.

What began as an attempt to help US steel, which was already in a long natural decline, is turning into a full-blown trade war that is already impacting stock prices and may ultimately impact ordinary citizens. The good news is that the threat to political careers may inspire some to get serious about negotiating us out of this mess.

The stock market is likely to remain sensitive to any and all news about this issue, which will only calm down when we know more about what will actually happen, and the uncertainly is removed.

If you have any questions about this blog post, investing, or your personal financial situation please feel free to reach out!

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