When countries impose tariffs, prices for raw materials and finished goods increase. Businesses that rely on imported supplies must either pass the additional costs on to customers or cut their profit margins, causing economic slowdowns. Trade wars also tend to escalate, as each country retaliates against the other’s new tariffs with their own, and so on. This back-and-forth can affect industries that weren’t directly involved in the initial conflict. The current US-China trade war, for example, has raised the cost of steel and aluminum, affecting nearly all industries.
When President Trump ran for office, he expressed disdain for many current trade agreements and promised to bring manufacturing jobs back to the United States. His administration enacted tariffs on steel and aluminum in 2018, prompting China to retaliate with its own set of penalties. The conflict appears to be escalating, and a global economic slowdown may follow.
If the trade war continues, it could lead to higher interest rates and increased inflation that would likely delay any further Federal Reserve easing and possibly boost long-term Treasury yields. This may cause investors to shift their assets from fixed income to equities, and it could also have an impact on real estate investment trusts (REITs). In this environment, we continue to favor a diversified portfolio with allocations to international assets. For more information on this topic, we encourage you to read our article on the benefits of diversification.