Stock markets have fallen today as the US/China trade war escalates. I already wrote a short piece about that subject ahead of the latest round of stone throwing, here.
We can’t say what the results will be for any given class of investments, but we do have a recent real example to analyse. The EU banned all sorts of exports to Russia (an extreme sort of infinite tariff) to protest about Russian interference in Ukraine. We can see some of the effects of that now after 3 years. I will just look at an example.
In the UK, you might pay a couple of quid for a kilo of apples sourced from around the world (I checked with Sainsburys Online). Here I pay about 40p for Grade 1 Polish apples of the same sorts of variety. Now food prices in Lithuania are not typically 20% of what they are in the UK. The reason apples are almost being given away is that Russia was a huge market for fruit from Central and Easter Europe. That fruit is now coming into local markets and there is excess supply.
Lucky me – I like apples. But what about Russia – the target of the sanctions? I guess, with some media coverage supporting me, that prices for some foods went up in Russia because of the sanctions. But that means Russian growers can increase sales at higher margins and possibly even plant more orchards. Russia is a gigantic country with an enterprise culture (where it is not dissolved in vodka). So the simple analysis of the consequences of interfering with the trade process is this:
- Some products get redirected to different markets, creating surpluses and so prices fall.
- Some suppliers have no profit margin and go bust, so capacity in the supplier market eventually reduces
- Prices rise in the tariffed market, so that encourages increased local supply (witness the wine industry in South Africa during the anti Apartheid sanctions period). The sanctioned/tariffed economy slowly becomes more independent (if it is a a well resourced large country), or the population fall into poverty (if it a weak undeveloped country)
- Global trades shrinks.
This is an economic analysis and no political impacts are under consideration. Elected politicians create risks for investors because their time horizons are short in economic terms (to the next election) and they are not even interested in the long term consequences of what they do (in the main – there are honourable exceptions).
In the case of the USA and China playing tit for tat tariffs, we are looking at two huge economies with plenty of internal resources. So, they can probably tolerate the consequences and reshape. Maybe the US will modernise its manufacturing base, but Americans will pay more for their goods. Those of us who are neither in China nor the US can expect cheaper goods coming our way – the EU (+Britain) is a great place to go selling the stuff the US does not want from China and vice -versa. I predict, tongue in cheek, more soya and pork from McDonalds and Huawei phones at half the price of Apple!
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