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How Can a Trade War Affect You?

How Can a Trade War Affect You?

On Friday, July 6, 2018, at 12:01 a.m., the United States fired the first shots of the war. No missiles were used. No drones or US Navy was also involved. Instead, these blows were billions of dollars in tariffs aimed at the Chinese economy. It was a trade war. The one that still continues and could become the greatest in the history of the world.

This article examines what trade wars can mean for competing countries, businesses, and consumers, and also, you can protect your 401(k) from a market crash caused by trade wars.


The basics of trade wars

The term trade war is used to represent an economic conflict in which, in response to protectionism, countries impose trade barriers on each other, such as tariffs, restrictions, and quotas.

One country imposes specific tariffs on another's economy to protect its own economy or harm its opponent's. The former may believe that the commercial practices of the latter are unfair.


Example of a trade war

Suppose country A and country B produce model train toys. County B then begins to subsidize the production of its train toys. This means that the government of country B pays part of the cost of production, thereby lowering the price for consumers.

Now, country A is angry because no one will buy train toys from it if it is cheaper to buy from country B. So country A has two options. Country A can trade with country B or impose tariffs on imported train toys. The tariffs would increase the cost of train toys in country B, thereby punishing country B.

If country B decides to continue exporting to country A, it will have to pay a higher tax for exported train toys. Therefore, country B is likely to respond with its tariffs. This round tariff trip is considered a trade war.

Countries often get into trade conflicts. To fix them, they can turn to the World Trade Organization (WTO) for arbitration and decide who to blame. They can negotiate an agreement directly with each other. Another option is to impose unilateral tariffs on your opponent's products in the hope that he will give up.

The US trade war with Japan in the 1980s aimed to correct the trade imbalance in electronics. President Reagan imposed 100% taxes on products made by major Japanese manufacturers to punish Japan for violating its trade agreement.


Ways Trade Wars can affect you.

Here are some of the ways a trade war can affect you.


Consumer goods can cost more.

The tariffs aim to raise the price of imports to help US producers of the same products. However, rising prices will ultimately hurt consumers who actually buy finished goods.

During President Trump's administration, he focused on a list of specific products worth around $50 billion, focusing mainly on industrial machinery - aircraft parts and steam turbines, for example - that Americans are unlikely to buy every day. However, companies that use these materials pass the additional costs on to consumers. For example, new tariffs on steel will cause the company to raise prices. 

Other sectors affected are agriculture, electronics, and the automotive industry.


Your pension savings may be affected (your 401(K))

Chances are your portfolio will be affected by a trade war if you're one of the millions of Americans saving for retirement using a 401(k) or investing in the global stock market. Tariffs are not just for a target product. They disrupt supply chains and drive up prices, creating a large-scale economic domino effect. Finally, tariffs block the growth that companies thrive on to generate more revenue and increase their value.

For you, this could mean a decrease in the value of your investments. And even if negotiations prevent crippling tariffs, the threat of them affects the markets. 


Unemployment could rise

The retaliatory tariffs could target several specific sectors. A drop in demand for the products produced in these sectors would directly and almost immediately affect employment in these sectors. More importantly, the effects of tariffs can extend beyond the products directly affected, especially in communities that rely heavily on a dominant industry with export to the country that retaliated. In these areas, the economic crisis would affect everyone.


Other Unintended Consequences May Occur

The tariffs would have a number of geopolitical implications that are hard to imagine before they occur. 


There may be advantages.

Some people are eligible for taxes, but they tend to be a very small segment of the population. Steel and aluminum producers, for example, got a boost from Trump's tariffs on those products.


Final results

Protecting retirement savings against a trade war requires special attention. Track your asset allocation and the composition of your investments and rebalance them if necessary. 


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