For a while now the US and China have been in the grips of a trade-war, and events over the last week or so have seen things heat up with world share markets suffering.
A trade war occurs when countries raise tariff’s (taxes) to trade with other countries. In the case of the US and China, we see the US imposing additional tariff’s on certain products so that it is more expensive for China to import goods into the US.
China then retaliates by putting its own tariffs in place and we find ourselves in a tit-for-tat arrangement where neither side wants to relent.
A trade war goes against the free-trade movement that the World has been experiencing for the last 50 years or so, as it makes it difficult for countries to trade freely with each other. For example, if country A is really good at making product ‘AA’ and country B is really good at making product ‘BB’, then it makes sense for each country to concentrate on their strengths and trade with the other country to get the products they need.
A trade war would force each country to produce both ‘AA’ and ‘BB’ as it would not be worth trading the products with each other due to higher taxes. This leads to a less optimal outcome.
You may have noticed that each time the pressure of a trade war heats up, the share market goes down, and as fears of a trade war abate, the markets rally accordingly.
This is because the share market consists of many different companies and it is the relative fortunes of those companies that can be affected by a trade war. If the trade war is going to have a negative impact on a company, then its fortunes will be less clear, and the share price of the company would reduce. If the trade war is large enough that it affects the fortunes of many companies then the overall share market would reduce in value.
Unfortunately, this trade war is shaping up to be the largest in a long time, affecting the fortunes of many companies around the world, which in turn reduces global (and Australian) share markets.
In the case of Australia, the trade war has a negative impact because if the US raises tariffs with China it will be more difficult for China to trade with the US, which could lead to an economic slowdown in China. This is not good for Australia as we trade heavily with China by providing them with raw materials, and if their economy slows down, they will require less raw materials from Australia.
As you can see, a trade war can have far-reaching consequences. Fortunately, to date, most of the trade war has consisted of talk and threats, with little action to follow. Both the US and China know the consequences of a full-blown trade war and neither party would want the consequences of a trade war attributable to them.
At Hewison Private Wealth we continue to monitor the news, but we are also conscious of turning down the noise and continuing to invest in quality assets for the longer term. Remember, over the last few years we have had many events that threatened global growth; Brexit, Trump’s election win, North Korean tensions, to name but a few, and each time the markets have taken things in their stride after an initial bout of volatility.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.au
Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.