Tariffs and Trade Wars: What Every Investor Needs to Know
- Anatoly Iofe
- Apr 4
- 6 min read
Imagine countries placing extra taxes on goods imported from other nations to protect local businesses and workers. These taxes are called tariffs. A "trade war" happens when countries keep raising tariffs against each other, aiming to hurt the other country’s trade while protecting their own economy.
But trade wars often have unexpected consequences for everyone involved. In this article, we'll explain what tariffs and trade wars are, why they matter to investors, and how you can protect your financial future during uncertain economic times.
Understanding Tariffs and Trade Wars
First, let’s simplify what tariffs are. Think of tariffs like tolls you pay when driving on a road. If you want to drive into another country, sometimes you have to pay a "toll" or tax for your goods to enter that country. Countries usually use tariffs to encourage people to buy products made locally rather than imported products because imported items become more expensive due to these tariffs.
A trade war begins when one country feels disadvantaged by another country's trade practices and decides to increase tariffs to balance things out. Unfortunately, this often leads to retaliation, where the second country also increases its tariffs on goods coming from the first country. It can become a cycle that negatively affects the economies of both countries involved.
Why Trade Wars Happen
Countries enter trade wars for various reasons. Sometimes it’s about politics, where leaders want to appear tough or protect their national interests. Other times, it’s economic—countries may believe they're losing jobs and industries to foreign competition. By putting tariffs in place, they hope to encourage consumers to buy local products, thus supporting local businesses and jobs.
However, reality is often more complicated. While tariffs can initially help some local industries, they usually lead to higher prices for consumers because products become more expensive. For example, tariffs on imported steel might help steel producers within a country, but it makes things more expensive for companies that rely on steel to produce cars or construction materials. Eventually, those costs are passed down to consumers.
Immediate Effects on the Markets
Equity Markets
One of the first places investors notice the impact of a trade war is the stock market. When trade tensions rise, uncertainty increases—and stock markets dislike uncertainty. Investors get nervous, leading to significant fluctuations in stock prices. Stocks of companies heavily dependent on international trade can suffer greatly. For instance, large multinational corporations with extensive overseas operations typically see their stock prices fall when tariffs increase.
In simpler terms, investors might start selling stocks because they worry that these companies will make less profit due to higher costs and lower sales from tariffs. This can trigger a chain reaction, causing overall market prices to decline, at least temporarily.
Bond Markets
When stocks become volatile, investors often look for safer places to put their money, and bonds usually fit this role. Bonds are considered safer investments compared to stocks because they promise fixed interest payments over a certain period. During trade wars, the demand for bonds often rises, causing bond prices to go up and yields (the return investors receive) to decrease.
For instance, U.S. Treasury bonds become particularly attractive because they’re backed by the U.S. government, making them one of the safest investments globally. Investors rush to bonds to avoid potential losses in stocks, driving bond values up.
Commodities and Currency Markets
Trade wars also significantly affect commodities—goods such as metals, agriculture products, and energy resources. Tariffs imposed on commodities like steel and aluminum directly impact their global prices. For example, if tariffs increase on imported aluminum, the cost of manufacturing products such as cans or aircraft components rises.
Similarly, agricultural commodities like soybeans, corn, and wheat become vulnerable in trade conflicts. Farmers in exporting countries can face difficulties selling their products internationally, causing commodity prices to fluctuate wildly.
Currency markets also experience significant disruptions. Trade wars create uncertainty about future economic growth, causing currencies of countries heavily reliant on exports to weaken. A weaker currency can be beneficial for exports initially, as it makes products cheaper overseas, but it can also mean higher costs for imported goods and inflation domestically.
The U.S. Position in Trade Wars
Historically, the United States has been deeply involved in trade wars, often initiating them to protect domestic industries or correct perceived unfair trade practices. The U.S. economy is large and diverse, giving it significant leverage in negotiations. This means the U.S. often holds a strong position when entering trade disputes, particularly because many countries rely heavily on the U.S. market.
However, trade wars can also hurt American consumers and businesses. While the U.S. might initially appear strong, prolonged conflicts can lead to higher prices, disrupted supply chains, and harm to sectors dependent on global trade, such as agriculture, technology, and automotive industries.
Ultimately, the chances of the U.S. achieving outright victory in a trade war depend greatly on how effectively it negotiates and the resilience of its economy in coping with disruptions.
When Can We Expect Things to Settle?
Trade wars typically don't last indefinitely. Usually, these conflicts end when the countries involved recognize that the economic harm outweighs any initial benefits of protectionism. Historically, trade wars conclude through negotiations, resulting in new agreements that ideally benefit both sides.
Governments often face immense pressure from businesses, consumers, and even political allies who start suffering from increased costs and disrupted supply chains. When these groups voice concerns strongly enough, governments are motivated to compromise and find common ground.
Predicting the Outcome of Trade Wars
While it's challenging to predict the exact outcome of a trade war, most conflicts historically result in some form of negotiation and compromise. Prolonged trade wars harm both economies involved, reducing economic growth and creating hardship for consumers and businesses alike.
Eventually, trade partners typically agree on new terms that are fairer or more acceptable to both sides. This usually leads to stabilization in markets and a return to a more normal trade environment. However, longer-lasting trade conflicts might permanently shift trade routes, create new economic alliances, and alter global economic dynamics significantly.
What Should Investors Do During Uncertainty?
Here are practical steps investors can follow to safeguard their portfolios and navigate uncertain times during trade conflicts:
Stay Calm and Diversify
Diversification means spreading your investments across different types of assets (stocks, bonds, real estate, and commodities) and across different geographical regions. This strategy helps reduce risks because not all investments move in the same direction at the same time. A diversified portfolio can better withstand market volatility.
Consider Safe-Haven Assets
When uncertainty rises, consider increasing your investments in safer assets like bonds or gold. These assets usually hold their value better when stock markets are volatile, providing stability to your portfolio.
Focus on Domestic Companies
Invest in companies primarily operating within your country if international trade remains uncertain. Domestic-focused companies are often less impacted by tariffs and trade disputes since they rely less on exports or imports.
Adopt a Long-term Perspective
History shows that markets eventually recover from downturns and continue growing over the long term. Avoid making impulsive decisions based on short-term market fluctuations. Maintaining a long-term view helps investors stay calm and focused on their overall financial goals.
Regularly Review Your Portfolio
Stay informed about global economic developments. Regularly meet with your financial advisor or wealth manager to review your investment strategy. Adjust your portfolio if necessary to align with your financial goals and risk tolerance.
Final Thoughts
Tariffs and trade wars can seem intimidating, especially with frequent headlines predicting economic doom. However, by understanding how these conflicts work, recognizing their impact on various markets, and adopting sound investment strategies, you can protect your investments and position yourself for future opportunities.
The key takeaway is that while trade wars create immediate uncertainty and volatility, they typically resolve through negotiations and new trade agreements. Staying calm, maintaining a diversified portfolio, and focusing on long-term financial objectives will help you navigate these challenging times successfully.
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Sources:
*These organizations are not affiliated with IFG. IFG does not endorse, support, or recommend any information that is not provided by its affiliates or representatives.
Disclaimer:
Information provided is for informational purposes only, and does not constitute a financial advise, an offer or solicitation to sell, a solicitation of an offer to buy, any security or any other product or service. Accordingly, this document does not constitute investment advice or counsel or solicitation for investment in any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
