Among other topics, the US-China Trade War is one of the political topics that has investors sitting on the edge of their seats. It’s expected that this trade war could be hugely damaging to the US economy if it continues.
What does it mean for investors who are just starting out? Keep reading to learn about how it hits home.
What is happening in the trade war?
In 2017, the Trump administration decided to try to change the United States’ trade relationship with China. One key reason why the administration believes the trade relationship is unfair is because of the US trade deficit, in particular the US-China trade deficit.
This means that China exports a larger percentage of goods to the US than the US exports to China. Additionally, since Chinese goods are generally manufactured and sold cheaper than US goods, they have had an impact on how the US economy functions.
This competition has been linked to decreases in US production of many goods and is related to the outsourcing of some jobs.
Aside from this point, the administration also pointed out perceived intellectual property theft, forced technology transfer to China, and a desire to boost domestic production as reasons for initiating the trade war. However, evidence shows that a trade war will improve any of these economic issues.
When diplomacy did not yield the desired result, the Trump administration began to apply extensive tariffs to Chinese imports. In July 2018, the administration applied $34 billion of tariffs on thousands of Chinese goods. Not willing to budge positions, Chinese President Xi Jinping fired back with a total of $34 billion of tariffs on U.S. exports to China.
Just a month later, both economic superpowers applied an additional $16 billion in tariffs to one another’s imports. In September, the US applied a whopping $200 billion worth in tariffs to even more Chinese goods, and China responded by adding another $60 billion to US imports.
In May 2019, the US again tacked on another $200 billion worth in tariffs, and a month later China responded in kind with another $60 billion in tariffs on US imports.
When one country applies tariffs to another, companies tend to pass those expenses on to customers by raising prices, and sometimes absorb some of the losses themselves. The combination of higher cost of goods, lower consumer spending, and fear-based selling amongst investors contribute to instability in the stock market.
Additionally, this tit-for-tat trade war has had serious consequences for a variety of stakeholders, and does not appear to actually stand to benefit the US economy. In fact, it’s not actually certain that the US-China trade deficit is actually problematic for the US economy.
The tradewar has, however, negatively affected US farmers, autopart manufacturers, and some technology manufacturers. It has also generally destabilized the global and domestic economies, especially considering that there is no end in sight for this war.
What does the US-China Trade War mean for US investors?
So, when the world’s two largest economies rumble, what does it mean for investors?
While trade war may have very negative effects for the global economy in the long haul if it does not slow down, it is not completely negative for smart investors. Consider these points:
1.The trade war can create unique “bargain” investing opportunities
Some investors will be scared off by the trade war, believing that the tariffs will turn once profitable stocks into burdens.
Since we don’t know what the future holds this isn’t necessarily true, and as investors sell their shares, there may be unique opportunities to invest in still-profitable companies at bargain prices, especially if you’re a long-term thinker.
2. Small-cap companies may get a boost
As the trade war drags on and Chinese goods continue to get more expensive, it is possible that some small cap domestic companies may get a boost. This could create unique domestic investment opportunities.
3. More volatile market
Especially for investors focused on short-term returns, the increased volatility of the market as a result of the trade war could profoundly affect their wins and losses.
Long-term, the US-China trade war could spell trouble for the US economy if it drags on. However, until we know the ultimate outcome of this international diplomatic and economic challenge, it’s important to keep in tune with how this conflict can affect investment opportunities.
