What is a trade war? 

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. 

Why do share markets get jittery with trade war news? 

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. 

Should I be concerned? 

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.