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Why Investors Should Worry About A Trade War

The previous week had been a tumultuous one for the markets. Amazon’s shares dropped more than $100 as President Trump had declared war on the retail giant. Facebook is being investigated for privacy breaches in several countries. But that aside, market investors are most concerned with the enveloping trade-wars started by the American president.

But why are trade wars bad? Aren’t we told that it can actually help boost local jobs since we will have less international competition? Let’s take a look at some reasons this is not true.

1. Long-term planning becomes difficult

If there are concerns of tariffs then a company in any country producing goods who are considering an additional manufacturing facility will think twice. For a local business who think business will improve with better trade protection, they too will have second thoughts since Trump could, and usually does, change his mind. In either case this hesitation would likely muddy up long-term planning for many businesses — not just ones directly affected by this trade war.

2. Added cost

By restricting the import of lower-cost goods into the market, costs will naturally go up. At heart of the US trade war is steel, and so all things that make use of steel (e.g. a car) will go up in price.  How much more?  It’s hard to say, but the usual low-low prices that Canadians are use to could be in for some sticker shock.

3. More red tape bureaucracy

With trade wars brings the added cost of extensive monitoring and collecting of tariffs. A lot more paperwork. In Canada, because we are exempt from this steel tariff, we currently have a committee in place that is specifically keeping track of other countries trying to offload steel to get around the U.S. tariffs.  So, although this trade war isn’t meant to affect us we are still paying the added cost because of it.

4. Historically, trade wars don’t protect jobs

The reason for trade wars is to ultimately protect jobs from being exported. The problem is it has never worked.  The American Great Depression is one example of that.  Sure, some steel jobs may be saved, but due to the higher costs placed onto the economy these jobs could end up being cut nonetheless.

Replies to this Post

  1. Brandt says:

    Canada will keep on truckin'. We always have.

    I'm an old fart and have seen many trade wars, big and small, come and go. And we are still here.

    Granted, Canada has been so kindly pardoned from the great King down south, but trade wars, although, lead to domino effects which could potentially hurt exempt countries, Canada is uniquely suited to handle many types. Nothing to worry about.

  2. Van H. says:

    Offloading into Canada is an understatement. I have seen it firsthand since I work in the field.

  3. Durell H. says:

    I disagree with your assumption that it protects jobs. Yes, prices could rise but you fail to mention that the consumer will just adjust to the prices and continue to consume. And as more companies locally pop up to compete the prices should fall again.

    The problem is that most of the profits from companies wind up as CEO and other executive excessive pay than being spread to their workers. So if CEOs can reduce their unnecessary paychecks the prices wouldn't even need to rise at all.

    They should be getting paid what the company earns.

  4. Kelsey R says:

    So this is why my funds have been taking a hit lately. Haven't been much of an researcher. Just watching the prices fluctuate. And sure enough my holdings are mostly steel and other manufacturing. 🙁

  5. Dane Hovey says:

    Personally, i don't think the tariff will last. Trump seems more in the pocket of cronyism and anything that suits his own wallet at the moment.

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