Could a Trade War Undo Recent Economic Gains?

March 15, 2018
1686 Views

President Trump has led a Republican Party push to balance the trade situation in the United States, making steel and aluminum imports less attractive for local manufacturers. The new trade tariffs will add 10% duty to aluminum imports and 25% to steel, and this can start a trade war. Canada and Mexico will be excluded from tariffs, at least until the North American Free Trade Agreement (NAFTA) is renegotiated.

If you’re an investor, then you may have followed the developing story of these tariffs, although, you might not have directly linked them to your own investments. With a recent analysis from the University of Pennsylvania; you might change your stance.

University of Pennsylvania Predicts Trade War Will Undo Recent Economic Gains

When a country as large as the United States implements tariffs on commonly traded materials, the rest of the world takes notice.

China and the European Union will be particularly hard hit by these tariffs, as their metals will become less competitive with US domestic alternatives. The tariffs are protectionist in nature, although most in the US would agree that they are not unreasonable. Even so, they may still come with repercussions.

A trade war scenario could develop where foreign governments respond with tariffs of their own, making American exports less competitive than they are today. This could include American brands that are manufactured outside of the US, including consumer electronics and software. American clothing exports could also be targeted.

The University of Pennsylvania has analyzed the situation and predicted that a trade war of some scale will take place. China and the EU have already vowed to respond to the US with tariffs of their own. Other countries could follow suit, depending on how much of an impact the tariffs have on their own economies.

The university has predicted that any ensuing trade war would have an impact that leaves the US economic output 0.9% worse off than what it could be in ten years’ time. If heavy tariffs continued between trading partners (in a hypothetical situation) then the output could be cut by 5.3% of its potential in 22 years’ time. Essentially, a trade war would offset the gains that have been made by recent tax cuts and strong economic growth. The university calculated the value at $200 billion over a ten-year period, and $1.4 trillion over a 22-year period.

The Importance of Staying Up to Date with All Financial News Stories

This kind of impact could leave the economy to advance at a slower pace, and could reduce consumer confidence, stock market investments, and could even impact employment and wages. Of course, the situation is all hypothetical at this stage, but there are strong signs to suggest that it will be difficult to find parity with the trading partners who have been significantly hurt by 2018’s tariffs.

If you invest anywhere, whether it’s the stock market, real estate, or even in bonds, then it’s important to stay up to date with any news that could impact the economy. A trade war could be managed with damages mitigated, or, it could end up to be disastrous for the economy and those of key trading partners. The progress of this story may turn out to be long and subtle, but it’s yet another factor that should be considered whenever you are making big financial decisions in 2018.

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