From semiconductors to soy beans, nothing seems to be safe from the tit-for-tat tariffs dominating the news. But what does the current trade dispute mean for investors?
Early this June, President Xi Jinping, China’s so-called “chairman of everything”, told a gathering of American and European officials that his culture’s attitude towards conflict was somewhat different to theirs.
“In the West,” he said, “you have a notion that if somebody hits you, you should turn the other cheek. In our culture, we punch back.”
Macroeconomics aside, this was the sort of executive tough talk — not at all exclusive to President Trump — that helped give rise to the current trade crisis, leading the world’s two mightiest economies to play what is beginning to feel like a game of chicken with the global trading order.
So how did we get to this?
Long before entering office, Donald Trump was a vocal critic of Chinese trade practices. Campaigning back in 2016 on a protectionist ticket, he pointed to China as the great ascending threat to American economic dominance — not only in the global influence it was accumulating but in its ‘criminal’ business operations.
He argued — and effectively proved in the Section 301 report commissioned by the White House — that Chinese companies, and the centralized one-party state supporting them, were involved in widespread breaches of intellectual property law, with counterfeiting and economic espionage occurring in virtually every sector of American industry, from top-secret weaponry to high-street fashion.
On top of this, he spoke out against the US trade deficit with many of its partners, especially China. A trade deficit occurs when the cost of a country’s imports exceeds the value of its exports. Simply put, China was selling more to the US than it was buying from it. A lot more. $376 billion more.
Few economists would deny the validity of these grievances, but fewer still would prescribe a full-scale trade war as an appropriate way to address them.
Yet, in recent months, the Trump administration decided to make a big stand. The first volleys were fired in March when Trump floated the idea of 25% tariffs on steel imports and 10% on aluminum to be implemented on what the White House called “national security grounds”.
These were not only directed at China but at the European Union and the US’s partners inside the NAFTA trade area, Mexico and Canada. The move provoked considerable pushback from allies, who took issue with being collectively labeled a “national security risk” and appealed to the World Trade Organisation to declare the tariffs illegal.
The European Union, heavily reliant on the American market for its steel exports, hit back with tariffs on a variety of iconic American products, from motorcycles to blue jeans to bourbon whiskey. Countering this, Washington threatened to levy a large tariff on European automobiles if any retaliatory measures were taken. That particular standoff is ongoing.
Then, on June 15, the White House extended its tariffs, now as high as 25%, towards $50 billion worth of Chinese goods. The first round of the tariffs took effect on July 6 and was applied to $34 billion worth of “industrially significant technology”, including nuclear reactors, boats, and aircraft.
In response, China introduced its own similar-sized set of tariffs on a range of American products, from corn and soybeans to automobiles.
A few days later, Washington raised the stakes by vowing to impose additional 10% tariffs on another $200 billion of Chinese imports. US Trade Representative Robert Lighthizer then released a list of the goods that would be taxed, which included a number of consumer goods such as furniture, computers, and luggage. Combined with the initial list, this further set of tariffs will cover more than half of all goods imported from China into the US.
And as if that weren’t enough, Trump said on July 20 that he was “ready” to slap tariffs on all $500 billion worth of Chinese imports.
This looks like it might get messy…
What should investors do?
“But what should I do about all this, as a long-term investor?” you might ask.
Firstly, what you should not do is panic.
The complexity of this dispute, which now involves several governments and has hundreds of billions of dollars at stake, makes it very difficult to predict anything. It’s entirely possible that Trump might end up imposing tariffs on all Chinese imports, but the conflict may well be settled diplomatically without any further retaliation.
Nobody can say for sure, but there are a couple of things you should remember in the meantime:
One, market volatility is inevitable.
Two, downturns are inevitable.
Aside from repeating these two eternal truths, there is little more anyone can say on the matter with certainty, except that a long-term, buy-and-hold strategy coupled with a diversified portfolio is the most effective way to deal with these ambiguities.
The current dispute between the US and its trade partners will doubtlessly affect the markets in the short term, but that should not worry you into selling your stocks early. It shouldn’t even keep you from buying stocks, if you are an investor-to-be.
In this century, for instance, grave warnings about imminent financial catastrophes were made during and directly after the events of September 11, the 2004 bombings in Madrid, wars in Afghanistan and Iraq, Brexit, the 2016 Presidential Elections, and the 2017-18 standoff between the US and North Korea.
In all cases, there was a period of market turbulence — often for only a few days, rarely more than a few weeks — before a complete recovery.
As our CEO Emmet Savage pointed out in an earlier blog: “if you had invested on the first of January of any year in history and held for twenty years, you’d never once have lost money.”
Once you have begun to see these events as mere speed bumps on a steadily ascending road, then you will get a better sense of how often things like this seem to spell disaster, and how rarely they really do.
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Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this article.