china us flags with gold bars

‘Investors are running for cover under haven umbrellas, as global equity indexes are crumbling under the weight of an escalating trade war.’ –Stephen Innes, senior trader at Oanda [1]

A global trade war is raging. Fiery verbal exchanges and escalating trade tariffs between President Donald Trump and leaders of the world’s other major economies continue to dominate news headlines. One week after President Trump left the Group of Seven (G-7) summit early following a Twitter spat with French and Canadian leaders over America’s increasingly tough trade policy, he slapped tariffs on Chinese imports, sparking an all-out global trade conflict.[2]

With rising inflation and widespread predictions of a recession as soon as next year, a trade war could deal a serious blow to an arguably already fragile economy. If equities are any kind of barometer of market sentiment, the country is in serious trouble.[3] The time is now to protect your wealth with precious metals—the ultimate safe haven in times of financial crisis.

Trade War

The possibility of a trade war with China has loomed for months. Last Friday, President Trump followed through on his threats and levied a 25 percent tariff on $50 billion in Chinese goods—retribution for alleged international intellectual property violations. In response, China promptly slapped a 25 percent tax on $50 billion worth of American goods.[4]

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Monday brought a second round of tariff threats. President Trump warned China that the U.S. would impose a 10 percent tax on another $200 billion in products if China followed through on the retaliatory tariffs it promised on Friday. Rather than back down, China’s Commerce Ministry pledged to fight back with ‘comprehensive quantitative and qualitative measures and retaliate forcefully.’[5]

With this latest clash, China joins Mexico, Canada, and the E.U. in a worldwide trade conflict with the U.S.

Economic Consequences

When you weigh the potential gains of a trade war against the economic losses, it’s difficult to see how the U.S. could come out on top even if it won. Slower economic growth, reduced international sales, steeper consumer prices, and plummeting corporate profits—these are just a handful of the problems a trade conflict could bring.

American Industry

Retaliatory tariffs could hurt some major American industries: energy, farm products, and automobiles. Chinese demand for soybeans, crude oil, and cars from the U.S. could drop. These are all major exports. For example, General Motors sold over a million more cars in China than in the U.S. in 2017, and crude oil was the fastest growing export sector.

The consequences for the economy could be widespread: demand for American goods could fall, shrinking CEO and investor confidence, and ultimately sending shocks through the stock market. Trump’s former top economic advisor, Gary Cohn, has warned that a trade war could erase any corporate gains from the recent tax cuts and, worse, result in a recession.[6]

American Workers

In the past, trade tariffs have caused more jobs to be lost than saved. In 2002, President George W. Bush levied a 30 percent tax on steel imports, saving about 3,000 to 10,000 jobs in an industry that employed only 197,000 workers. The move resulted in roughly 200,000 job losses in the U.S. manufacturing sector.

American Consumers

The Trump administration has highlighted that it’s targeted mostly ‘industrial significant technologies’ in its first round of tariffs against China. Less has been said about the second phase of taxes. However, companies that have to pay more for supplies like watertube boilers and steam turbines will pass those expenses onto consumers in the long run.

‘Production costs will go up here. Consumers are going to lose and pay a higher price no matter if the goods are consumer-based or industrial supply-chain products,’ asserted Chris Rupkey, chief financial economist at the Tokyo-based global bank MUFG.[7]

U.S. Stock Market

What kind of impact could the trade war have on the stock market? An ‘ultimately bullish’ one according to President Trump’s trade adviser Peter Navarro.[8] Investors certainly don’t agree. Stocks plummeted on the U.S. and global exchanges on the Tuesday following President Trump’s initial imposition of tariffs against China. It was the worst day for the Dow so far this month, pushing the index into “slightly negative territory for the year.”

Historically, trade tariffs have been bad for the stock market. The Smoot-Hawley tariff act of 1930 caused the stock market to plunge and exacerbated the Great Depression. In 2002, the taxes Bush levied on steel imports sent equities into decline for eight straight months, and they didn’t fully recover for another two years.[9]

Protect Your Portfolio Now with Gold

While the full economic consequences of a trade war may take months to unfold, investor sentiment has already shifted into panic mode. Even if the stock market rebounds, the lift won’t last for long, as history has shown trade tariffs can weigh on equities. Buying gold and silver now before the economic crisis sets in and safe haven demand skyrockets is the best way to avoid paying a steep premium to protect your portfolio.