China currently sells about $500 billion worth of goods to the United States every year. They’re very much dependent on us, as we are on them. However, the President has repeatedly expressed his intention to curtail the import of goods from overseas and instead bring back more American manufacturing jobs. Many are worried that this could upset our economic relationship with China and perhaps even start a trade war. What would the repercussions of such a war be on the markets?
Causes of the Trade War
One of the reasons why the U.S. does so much business with China is because it’s much cheaper to buy things there than to make them here. Donald Trump’s plan to bring jobs back to the U.S. includes offsetting that price difference by imposing tariffs on imported goods, of between 35% and 45%. By making the price of imports high enough, it will eventually become cheaper to manufacture goods locally.
However, the seeds of the trade war begin before Trump even took office. We haven’t enacted any tariffs yet, but China has already implemented import quotas on several common commodities, such as rice, wheat, and corn. This means we can’t sell as much to them as we previously did, damaging our own business.
If Trump does impose these tariffs and China retaliates with tariffs of their own, or if we choose to impose import quotas in response to those China has set, then the result will be a trade war.
Results of a Trade War
So if a trade war does erupt between the U.S. and China, how would it impact us? How would it affect the markets? For one thing, it could lead to significant losses for a number of major companies.
Corporations including Starbucks, Apple, and many others have some of their largest markets in China. If China were to retaliate against higher tariffs, they could lose much of that business. Their stocks would likely fall significantly. It could furthermore result in a ripple effect, damaging other companies in the process and causing serious market downturn.
Another result would be higher prices for a variety of manufactured items. Imposing a tariff would make it cheaper to produce goods in the U.S. than in other countries. However, it would still be more expensive than what the companies were previously paying, before the tariffs.
To offset these costs, they’ll be forced to raise prices, and we, the consumers, will end up paying for it. Trade with China is one of the things that enables certain companies, such as Walmart, to keep their prices low. In a trade war, it would be more difficult for them to keep their products available to lower income families.
The most important issue to consider is that, if we do start a trade war with China, we would most likely lose that war. We’re much more dependent on them than they are on us. There are a number of other countries that will happily do business with them, without imposing tariffs, import quotas, or other obstacles to free trade.
Though a trade war with China does seem to be on the horizon, it hasn’t begun just yet. As far as tariffs and imports go, Trump’s main focus so far has been on Mexico. It’s likely that China will be next on the list, but exactly what will happen remains to be seen. Still, it’s a good idea to protect yourself and safeguard your investments now, before it’s too late.