Trade War Could Have Dire Consequences for U.S. Economy and Stock Market
President Donald Trump has taken an “America First” approach in his tussle with the world on trade issues. This has initiated a trade war between the U.S. and the major global economic hubs.
Understand that trade wars don’t end well. You see, the trade war we currently see escalating could send the U.S. toward an economic slowdown and send the stock market tumbling.
Tariffs Could Hurt Consumer Spending
Look at the economy first.
The Trump administration has imposed duties on goods coming into the U.S. from around the world. For example, steel and aluminum coming into the U.S. from Canada is subject to duties of 25% and 10%, respectively.
In simple words, if $1.00 of steel was coming into the U.S. from Canada, it would have a “tax” of $0.25 on it.
Now the big question: What do you think will happen to U.S. manufacturers that use steel and aluminum in their products and were buying from Canada because of lower costs and the proximity of their facilities?
In the short term, they can’t really do much. So, they will find their production costs shooting through the roof. And don’t for a second think that they will bear the burden of the costs. They will all be transferred to the consumers.
Keep in mind, the U.S. government is imposing tariffs on goods coming in from major economic hubs, including China and the European Union (EU).
A trade war could hurt the American consumer. Suddenly, costs could soar for consumers and they may decide to spend less than before. If consumer spending suffers, the U.S. economy will face headwinds.
How Could a Trade War Lead to a Sell-Off in the Stock Market?
If there’s one thing you should know, it’s that stock markets hate uncertainty.
All the noise about tariffs and trade wars is creating a lot of uncertainty. Trade wars tend to hurt the profitability of companies, and we are already seeing companies suffering.
For example, Milwaukee-based Harley-Davidson Inc (NYSE:HOG) has gotten caught in the middle of the trade war.
The EU has imposed tariffs on American goods in retaliation to the U.S. tariffs. Harley-Davidson’s motorcycles are costing more in Europe, and the company could lose sales in the region because of this.
The company is absorbing the costs (about $100.0 million) for now, but it is also planning to move some of its production facilities outside of the U.S. (Source: “For Harley-Davidson, the cost of Trump’s trade war is $100 million and lost American manufacturing,” Quartz, June 25, 2018.)
Obviously, all of this will lower the company’s profit, and could hurt the HOG stock price severely.
Keep in mind that Harley-Davidson isn’t the only company facing this sort of issue. A lot of companies are trying to figure out what’s next.
All of this could spook stock investors. Investors running for the exits could cause a massive sell-off .
What’s Ahead?
Dear reader, we are certainly living in interesting times.
President Trump’s “America First” approach could cause a lot of pain in the short term.
We may see American companies lay off employees, and some companies, like Harley-Davidson, may even move their facilities out of the country in order to avoid the uncertainty of the trade war. This could have a massive drain on the U.S. economy.
Investors may sell their stocks because companies thrive in times when the business environment is friendly and the risk of doing business is low. In trade wars, you don’t have that.
I can’t stress this enough: capital preservation is the key at this point. President Trump’s trade war with the world could be the catalyst for the next stock market crash.