Trade War Risks Are Rising Fast: 3 Facts All Investors Need To Know

Posted On June 19, 2018 12:26 pm

For months now US investors have been worried about a possible trade war between the US, our allies, and China. What started with 25% and 10% steel and aluminum tariffs, respectively, on global imports has now escalated to 25% tariffs on $50 billion worth of Chinese imports. In addition, according to the US, in retaliation for years of Chinese theft of US intellectual property (patent violations), the US in now preparing a list of $200 billion more in Chinese imports that could face 10% tariffs unless trade negotiations bring a resolution to the underlying issues. In addition President Trump has ordered the US trade representative to launch an investigation into whether 25% tariffs on foreign vehicles would be in the best interest of national security. Finally the President has threatened to pull out of NAFTA should the US not achieve its goals of a fairer deal that includes a 5 year sunset provision. This means that NAFTA would have to be renegotiated every five years, a provision that both Canada and Mexico have said is a deal breaker.

With trade talks apparently having failed thus far, and risks of a multi front global trade war now escalating, the stock market has resumed its previous free fall. As I write this the Dow is down 350 points and set for its sixth consecutive day of losses. So naturally investors want to know just how bad things could get. So here are three important facts about how an escalating trade war could affect your: wallet, the economy, and your portfolio.

How This Will Affect Your Wallet

A tariffs is a tax on imports designed to raise the price of a good and make US manufactured versions of a product more competitive. This ultimately means that US consumers will be facing higher prices. For example when the US instituted earlier tariffs on foreign washing machines the result was the average price of a washing machine increased 17%.

As the list of tariffed goods grows this means higher prices on a larger list of products. The biggest increases are likely to be seen from steel and aluminum tariffs which find their way into thousands of consumer products. For example the price of US steel has now spiked close to 50% since the tariffs first went into effect. This is double the actual tariff rate. The reason for that is that the complex global supply chain the US is now a part of means that sudden disruptions can’t be countered by US manufacturers of tariffed products rapidly ramping up supply to meet demand. For one thing there are specialty forms of products such as tubular steel (used in pipelines) that aren’t manufactured in the US at all (most tubular steel comes from South Korea). It will take significant time for US manufacturers to put in place the proper tooling to recreate the versions of tariffed goods. This is what’s causing sharp spikes in prices.

Rising steel and aluminum costs will be passed on in the form of higher prices for things like canned goods, cars, and appliances (washing machines are going to get even more expensive). Meanwhile the list of 1,300 Chinese imports that will soon be facing tariffs includes everything from pharmaceutical inputs (higher drug prices), to electronics. The longer list of $200 billion worth of Chinese imports that facing a 10% tariff is not yet out. However its enormous size means that textiles are likely to be affected. This means a minimum of 10% (possibly 15% to 20%) increase in prices for clothing and consumer goods found in US retailers like Walmart, Target, and Costco. And if foreign cars are slapped with 25% tariffs then it means US vehicle sales are likely to rise significantly, on top of any price increases caused by steel tariffs already in place.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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