Firstly, a quick history lesson. Globalisation has been on the increase since the 1980s, with a surge in global trade. However, over the past couple of years, certain geopolitical events are changing attitudes and the US has started to address what they see as imbalances. This is leading to a shift towards protectionism. In other words, a reversal of globalisation.

A trade war is when countries start imposing tariffs (taxes) on each other’s products. Putting tariffs on products discourages global trade as it makes it more expensive to bring goods into the country. Open trade is generally seen as a good thing as people are able to buy goods and services more cheaply, resulting in increased living standards.  

The recent trade wars started when US President Trump imposed tariffs on steel and aluminium imports. The rationale for the tariffs was to improve local industries. The tariffs are also seen to be punishment to China following claims that China is stealing US technology and intellectual property.

China retaliated, threatening to impose their own tariffs targeting US products that depend on the Chinese market – such as soybeans.  

How could this impact your portfolio?

Studies throughout history have shown that tariffs do not correlate with economic prosperity. Tariffs generally lead to lower productivity and higher prices. Companies with earnings sourced in the US or China could see their earnings impacted. Fortunately, the probability for a full-blown trade war is low. In fact, some commentators are actually saying that trade wars between the US and China could help Australia. For example, Australia’s exports may become more competitive due to the tariffs on other countries.  

As we always say, turn down the noise and don’t let geopolitical events such as this impact your investment decisions. A lot has to happen for these tariffs to get through. As we have seen over the last few years, many geopolitical events such as Trump’s election victory, Brexit and North Korean tensions have not necessarily had lasting and meaningful impacts on financial markets.