When a trade war starts, it disrupts global supply chains and causes price increases. It can also strain international relations.
During his campaign for the presidency, President Trump voiced disdain for current trade agreements and promised to bring manufacturing jobs back to America. In his administration, he’s put pressure on China to change aspects of its economy that facilitate unfair trade practices, such as limited market access and intellectual property theft. In return, the EU has threatened to hit back with tariffs on $24 billion worth of US products—from chicken and peanut butter to motorcycles and clothes. The resulting higher cost of raw materials hurts manufacturers’ profit margins and can lead to increased prices for consumers and businesses.
In the long term, a trade war reduces economic output as companies can’t easily access low-cost inputs and sell their products to global markets. The distortion of price signals also undermines the benefits of specialization that maximizes global productivity.
Although short-term costs may be bearable, the overall effect of a trade war could be negative for most economies—especially those of the United States and China, which together account for almost half of global GDP. In addition to losses in real estate and manufacturing, financial markets are likely to face stress, with monetary stimulus wearing off and interest rates rising. This would slow new credit flows, which could restrain investment and industrial production. Investors can minimize the impact of a trade war by diversifying their portfolio, including allocations to real assets and international markets.
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