The trade war… and your money.

“ when elephants do battle its the grass that gets trampled”  – African proverb

Pick up any newspaper, dial into any business channel; from Twitter to TV – you name it;  it socks you like a thundering right from the late great Muhammed Ali.  Yes, you guessed it, ‘Trade Wars’.

But what exactly is a trade war?  To answer this, one needs to look at how nations protect themselves economically. They do this by imposing tariffs on foreign imports.

It is counter to free trade, which in and of itself means that goods are treated the same wherever they happen to be from.  So if Californian wine is cheaper than South African wine, South Africans are free to buy Californian wine.  It was a British economist.  David Ricardo (1772 – 1823) who perfected the economic argument for free trade.

This is all well and good in theory argued the German economist Friedrich List (1789 – 1846). If the playing fields were level, contended List, then free trade was fair and to be encouraged.  There would ultimately be a win-win situation between trading partners.

But playing fields are not always level.  Enter centre ring China vs U.S.A.  In simple terms the U.S.A. is accusing China of keeping her currency, the Renminbi, artificially pegged at a level that is weaker than the US Dollar.  A little thought will show that Chinese goods are cheaper than similar goods in the U.S.A.  So cheaper Chinese imports have been flooding U.S. markets – at the cost of manufacturing and jobs at home ie. the U.S.A.  The United States wants China to let her currency [Renminbi] float ‘freely’ against the US Dollar.

The way President Donald Trump has sought to deal with the issue (bear in mind there is an election coming soon in the US), is through the time honoured mechanism of tariff imposition on Chinese imports into the U.S.A.  If an imported good cost says US $100, a tariff of say 20 % means the landed good will now cost US $120.  This by extension protects local U.S. industry and jobs.

In a tit-for-tat move, China has imposed tariffs on American imports into China.

The above is a very simplistic overview of what is happening right now between China and the United States.

What we must not lose sight of is the economic ripple effect around the world.  And this is causing uncertainty, with businesses adopting a wait-and-see attitude.  Markets don’t like uncertainty.  For economies to grow there needs to be investment by both state and private enterprise.  Trade wars inhibit economic growth.

Until the trade war between China and the United States is resolved, we will have to batten down our hatches until the storm passes over.

This volatility needs to be managed, the last thing we need now is the emotional upheaval that can ruin your financial goals.

We at PPW can assist through the power of shared knowledge and a team of specialists to weather this storm

Give us a call.