Trade WarThere is an awful lot of talk about trade wars these days. Let’s take a couple of minutes to review what a trade war is, what it isn’t, and how it might affect you.
My first lesson on trade came at the grade school lunch table. I didn’t like carrots, so I traded them to a friend for some grapes. We both ended up with food that we enjoyed. See, trade can be good.
In the real world, trade gets a lot more complicated than that. The U.S. (and any country) can decide that other countries have too good of a deal and start taxing things as they get shipped here. Let’s say we do that to $50 billion of products coming from China. China isn’t going to like that because it means we will buy less of their stuff. So they start charging taxes as $50 billion of U.S. products enters their country.
At this point we have hit a “trade war.” Obviously there are no lives at stake, but livelihoods are at stake. Trade wars are bad for stocks, if they actually occur, because they make everything more expensive. We all live on a budget. If prices go up, we buy less things.
Now, should you worry about a trade war? The answer is no…if you have a diversified investment plan. There will be winners and losers in a trade war. Nobody can predict who will win and who will lose, so don’t bother trying. If you own stocks around the world, you will still do well in the long-run. If you have enough stable bonds, you will be just fine in the short-run.
Nobody can tell you today whether or not an actual trade war with China or Mexico or Canada or the European Union or the United Kingdom will occur. Don’t listen if they say they can. Instead, plan for a variety of scenarios and hope for the best.