Five reasons why investors are right to worry about trade wars
So, this week, like last, markets went a little crazy over the possibility of more trade wars enacted by President Donald Trump. It was indeed a scary week, especially in tech-land, where we saw Amazon (AMZN on NASDAQ) shares drop more than $100 at one point on Wednesday. Sure, it wasn’t all trade-war related, and Facebook’s privacy breaches need to share some of the blame. But trade wars are certainly worrying for investors, and investor fear is back in vogue. Why are trade wars so bad? Let’s take a look at five reasons, and this might explain why most investors simply wanted ‘out’ this week.
Trade wars simply don’t work
Seriously, Mr. Trump, any first-year university economics student knows this. Trade wars simply are not effective. We could reference — what should we use, now — oh, yeah, the Great Depression, as an example. Other politicians such as George Bush have also tried to implement tariffs and duties, and none have really succeeded at all.
They add bureaucracy
In addition to having to monitor and collect tariffs, trade wars add other bureaucratic and red tape issues. In Canada, for example, a committee has already been set up to make sure than other countries do not ‘dump’ steel into Canada in reaction to the U.S. steel tariffs. More paperwork, less efficiency and higher costs are the result as companies try to ‘game’ the system and try to get around the tariffs in any way possible.
They add costs
By preventing low-cost products from entering a market, everyone’s costs go up. The price of steel, for example, rises on average, and then the cost of everything with steel in it goes up. A car buyer in Idaho, thus, pays more for his/her car thanks to Trump’s fight with China.
They prevent effective long-term planning
Imagine you are a company producing goods (in any country), thinking about adding a second manufacturing facility. But, rumours abound that your goods will face tariffs. Guess what? You are not going to build that second facility. How about the same type of company in the U.S.? Maybe they think business will improve with better trade protection. But what happens when Trump goes, or if he changes his mind on tariffs? Either way, that new facility is unlikely to get the green light to be built.
Trade wars don’t actually protect jobs
That’s what they are supposed to do, but the reality is quite different. Sure, some steel jobs might be saved. But look again at our third and fourth points above. Tariffs result in less capital spending and higher costs. Again, any economics student knows that that is a recipe for net job losses across an economy, not net job additions.
We could give you dozens of more reasons why tariffs and trade wars are bad, but in keeping to the theme of this column we will stop at five. Mr. Trump, give us a call if you want some more pointers on how your plan is such a bad idea.