Trade Wars! (Should I Be Scared?)

Trade wars! You've heard a lot about them lately. They seem scary. And maybe you have questions. Like: Will anyone get drafted? Will civilians be hurt? Will they someday make a version of Saving Private Ryan to commemorate the event, except with some Chinese solar panels or Canadian milk playing the part of Matt Damon?

Or maybe you have more practical questions. Like: What is a trade war? Or: Will the economic tensions between the United States and seemingly everyone else blow up the economy? Or that most practical question: Should I sell my investments and hide under my bed?

Let's take it one step at a time.

What, exactly, is this trade war about?

Let's start with the current situation. The United States government doesn't like the terms on which it's trading with various other nations. So it is trying to change those terms.

Changing the terms of a deal is never easy. And it's especially difficult with really complicated deals hashed out over marathon diplomatic sessions that carry implications across all the countries involved. So the American government is trying to use leverage so other countries will be motivated to change. Among other things, it's increasing tariffs (money charged on a particular product when it crosses the border) on certain goods.

As you may have guessed, the United States' trading partners don't really want to be bullied into changes with tariffs. So they're also increasing tariffs to show that they will not back down.

People are scared there will be an all-out trade war, with each nation ratcheting up the economic pressure to try to make its partners back down.

What would happen if there were an all-out trade war?

First, let's get some perspective. The number of tariffs that have been discussed thus far is really small relative to the size of the economies they'd affect. The U.S. economy, for instance, produces about $20 trillion in goods and services, and the current tariffs affect a fraction of a percent of that. In the EU, the tariffs that have been proposed affect a tiny fraction of GDP.

If this stand-off escalated into a full-blown trade war, it would definitely have economic repercussions. Economies would grow more slowly. Consumers would feel poorer because the goods they buy would get more expensive (thanks to those tariffs). The economist Paul Krugman did some math and estimated that the maximum impact would be 2-3% of GDP, which is about the growth rate of a developed economy in a year. That's also about 1/3 the size of the 2008 recession. Beyond the direct costs, there are indirect ones. Like that tariffs and trade restrictions would force some companies to make things in different places. That could be extremely costly and cause significant job losses.

OK. So what should I do? Sell everything?

You're investing for the long term, right? That's what passive investing is all about. So ignore this, and most other, news. In general, trading on the news without special insight (the type of insight that hedge funds have teams of analysts and connected advisors working on constantly), usually results in losing money. In fact, even people who invest in those hedge funds don't reliably make money after fees and costs!

As a long-term investor, we think you should focus instead on the historical evidence that, over time, relatively risky assets (like well-balanced portfolios of stocks and bonds) will outperform cash; and that the folks who think they can time the market will end up losing.

All investing should be considered long-term. While stock markets have typically trended upwards over the long term, your investments can go up and down, and you may get back less than you invest.

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money.

Money Diaries

"MY UNDERGRADUATE ADVISER TOLD ME I SHOULD JUST FORGET ABOUT THE WHOLE WRITING THING. ‘YOU SHOULD FIND A GOOD MAN AND GET MARRIED,’ HE TOLD ME."

Margaret Atwood

subscribe

Get the best stories from our magazine every month

Sign up for our email newsletter

  • Finance for Humans

    Seven Financial Moves to Make When You Know You’re Having a Child

    There are a few simple ways to make sure you have your ducks in a row when you become a parent. Do them as soon as you can! You’re a responsible adult now, after all. Here’s how.

  • Finance for Humans

    A User’s Guide to Participating (or Not!) in an IPO

    A guide to the frenzy, the idiocy, the opportunity, and everything else you need to know before investing (or not) in IPOs.

  • Get Started

    Get rich slow

    Powerful financial tools to help you grow and manage your money. Get started now.

    see-more cta
  • Finance for Humans

    Is your Payment App Making You Passive Aggressive?

    Our columnist explores the slippery ethics of using payment apps, and how they can actually make dealing with money weirder.

  • Finance for Humans

    How to Work in the Gig Economy and Still Save Like a Corporate Lifer

    There are lots of things to recommend about the freelance lifestyle. But matching pension contributions and a regular pay cheque aren't among them. Here's how to be the boss of your own money.

` `

Meet Wealthsimple

Get rich slow

Powerful financial tools to help you grow and manage your money. Get started now.

Learn moreright arrow icon

Our best stories, once a month.

Sign up for our newsletter

The content on this site is produced by Wealthsimple Technologies Inc. and is for informational purposes only. The content is not intended to be investment advice or any other kind of professional advice. Before taking any action based on this content you should consult a professional. We do not endorse any third parties referenced on this site. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only. By using this website, you accept our (Terms of Use) and (Privacy Policy). Copyright 2020 Wealthsimple Technologies Inc.

;