Will there be a trade war between the United States and China? Despite all of the recent news, it is hard to say. According to Bloomberg, some analysts dismiss Trump’s words as mere “political rhetoric,” while others warn of how things could get worse as neither Trump nor the Chinese can afford to back down or look weak.
But if growing fear of a trade war has caused the S&P 500 to lose nearly 200 points compared to one month ago, what damage will an actual trade war do to Wall Street? While some fear mongering has been overblown, a trade war would have severe effects on a US economy which is already overdue for a recession. Wall Street should be seriously concerned about a trade war and investors need to understand how key sectors will be affected as well as the general economy.
Economic Uncertainty and Inflation
It is important to remember that a trade war will not begin tomorrow, or even for a few months. We should expect Trump’s currently announced tariffs to go into effect in the summer, and there is the possibility that negotiations between Trump and the Chinese can lead to a trade agreement.
But the recent tumbles in the stock market should make clear that the tariffs do not have to go into effect to unnerve investors. Furthermore, Trump and the GOP had hoped that their tax cuts and economic spending measures would spark further growth. But since no one can be sure about which tariffs will be in place six months from now, this creates further uncertainty. Should American companies continue relying on Chinese suppliers, or do they need to start looking elsewhere?
Furthermore, a trade war will cause not just economic uncertainty, but inflation as US and Chinese tariffs inevitably raise prices. The markets are already growing increasingly concerned about inflation thanks to low unemployment and the recent GOP tax and spending bill. Growing concerns about inflation could cause the Federal Reserve to impose additional rate hikes, which would improve the yield of securities and take money out of the stock market.
In summation, the macroeconomic effects of a trade war is bad for the United States and will lead to greater economic uncertainty and the damaging effects of rising inflation. On the other hand, safer investments such as Treasury-backed securities or real estate may become better investments in this environment.
Retaliatory Tariffs
The vast majority of Americans will be hurt by a trade war, but who will be most heavily effected? We should begin by looking at those who will be hurt more by Trump’s tariffs, and those who will be hurt by China’s retaliatory tariffs.
Retailers and US consumers by extension will be hurt by Trump’s tariffs which will raise the price of consumer goods such as electronics. CNBC reported that the National Retail Federation and the CEO of Best Buy both issued statements warning against the impact of tariffs. Meanwhile, the South China Morning Post and another media website have observed that China’s retaliatory tariffs seemed aimed at rural states which supported the president, and the agricultural industry could suffer greatly from decreasing exports like pork and soybeans to China.
Investors may also want to avoid retailers like Walmart (NYSE:WMT), which already saw its stock fall temporarily in late March when trade war fears increased. And while manufacturers like US Steel (NYSE:X) seem like obvious beneficiaries, US Steel has lost over 20 percent of its share value over the last month.
Trump and his supporters like to point out that given the size of the US trade deficit, China cannot harm the United States with tariffs as much as the US can harm China. This ignores two things. First, even if the United States is not harmed as much as China, it will still be harmed as economics is not a zero-sum game and both sides can lose.
Second, China does have other ways to hurt the United States economy beyond imposing tariffs such as limiting American companies’ access to the Chinese market or switching contracts to other countries. A few manufacturers may benefit, but the majority of companies on Wall Street will be negatively impacted to some degree.
Hope for the Best, Prepare for the Worst
Wall Street investors and the American people have every right to be worried about the effects of a trade war, but we should remember that there is no guarantee that a trade war will occur. Perhaps one side will back down, or the countries could negotiate a trade agreement which works for both sides. But I am skeptical that will happen, and it definitely will not happen because the Chinese decide to back down. The tariffs will likely go into effect this summer, US retailers and other industries will suffer, and the results will be displayed on Wall Street. Combine that with increasing economic uncertainty and inflation, and investors should consider moving into safer assets and away from the sectors which will be hit hardest.