When a country uses tariffs, export restrictions, or other barriers to trade as a weapon in an attempt to gain economic advantage, it’s engaging in trade war. These conflicts can escalate and cause significant economic damage to both sides. The United States and China’s current trade war, for example, has raised fears of a global recession.
The escalating tariffs threaten to reduce growth in the economies of both countries, and this can push businesses and consumers to save more and spend less. This pause in spending can lower corporate profits and, over time, reduce stock prices.
As companies in the S&P 500 rely on international supply chains, any slowdown in global trade hurts their sales and revenues. That can push investors to rotate out of stocks into safer assets like bonds and gold, driving down the market.
When Trump ran for President in 2016, he promised to bring manufacturing jobs back to the US from nations like China and India, and he campaigned on a protectionist agenda. Since becoming president, his administration has implemented several rounds of trade-related sanctions against China.
The American tariffs have been met with countermeasures from China, and they could continue to escalate until both countries reach an agreement. However, such an agreement may not be easy to achieve. Both sides are demanding concessions from the other, and Beijing has already warned that it will raise tariffs further if the US does not make a deal.
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