History's Not on the Market's Side in a Trade War
The fallacy in interpreting the immediate investor reaction as muted misses the likely secondary and tertiary impact of tariffs.
Financial markets will have a tough time shrugging off a trade war.
Photographer: Spencer Platt/Getty Images
The first shots of a global trade war were fired on Friday as U.S. President Donald Trump announced a 25 percent levy on $50 billion of imports from China. The tariffs focus on “industrially significant technology,” and intend to hurt China for alleged theft of intellectual property rights. China responded within hours with a detailed list of imports from the U.S. valued at $50 billion that it would impose a similar 25 percent tax on.
The financial markets have largely taken the decisions in stride, probably due to some estimates suggesting a negligible impact on economic growth, employment and share prices. The fallacy in interpreting the immediate investor reaction is that it misses the likely secondary and tertiary impact of the tariffs on suppliers of the affected items, the higher cost to users and reduced demand for the affected items. Such an impact tends to occur gradually, and is likely to have a more profound influence on share prices over time.