The trade war between the United States and China just jumped to the next level. Negotiations have yet to produce a deal, leading the Trump administration to increase tariffs and move to expand the number of imports with tariffs levied against them -- which prompted China to retaliate. In response to the escalating standoff, the stock market had a volatile start to the week, with the Dow Jones Industrial Average down more than 600 points on Monday, followed by a significant rebound on Tuesday morning.
When any economic situation causes this much market upheaval, its important to take a step back, assess the situation, and understand exactly what were dealing with. So, heres a quick rundown of the latest trade war developments and how investors would be wise to react.
Image source: Getty Images.
The latest developments in the trade warLast week, the trade tensions ratcheted up significantly when President Trump tweeted that because of slow progress in trade negotiations, tariffs on $200 billion worth of imported Chinese goods would rise from 10% to 25% on May 10.When trade negotiations toward the end of last week failed to produce a deal or any meaningful progress, the higher tariffs kicked in as planned.
China responded by implementing 25% tariffs of its own on Monday, but on $60 billion worth of U.S. goods.Then, the Trump administration began moving to place tariffs on all $540 billion of Chinese imports, representing a significant increase from the previous segment of goods that were subject to the tariffs.
Why are tariffs such a bad thing?The tariffs are generally being sold to the American public as money in the bank. In other words, 25% tariffs on $200 billion worth of goods means an additional $50 billion in the U.S. Treasury. Thats a good thing, right?Heres the problem: China doesnt actually pay the tariffs imposed by the U.
S. And the U.S. doesnt pay the tariffs imposed by China. The businesses that import goods pay the tariffs. For example, if an electronics manufacturer wants to import $10 million worth of parts from China, and these parts are subject to a 25% tariff, it will cost this manufacturer $12.5 million instead.
When imports cost more, companies will still aim to make a profit. So they will pass the increased cost of the tariffs on to consumers. This could not only hurt the financial situation of U.S. households, but it could temper demand for certain products as costs increase. Basic economics says that when prices rise, demand falls, so companies could end up with lower revenue as a result.
The worst thing you can doThe absolute worst thing you can do in this (or any other) volatile situation is to panic and sell your stocks. Its human instinct when things get bad to get out before it gets any worse. This instinct can serve you well in some areas of life, but investing isnt one of them.
. It doesnt matter if the market drops by 2,000 points and experts are forecasting another 25% downside. Selling because the market went down is.....