The Independent Market Observer

Should We Be Worried About a Trade War?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jan 24, 2018 3:13:04 PM

and tagged In the News

Leave a comment

trade warWith the news that President Trump has imposed tariffs on solar panels and washing machines (an interesting combination), the prospect of a trade war has moved to the front of the risk parade. What do these tariffs mean for your investments and the economy? Should we be worried? Despite the headlines, the answer is “not yet.”

Tough on trade?

Let’s take a look back at the past year since the election. The president ran on an explicit campaign to get tough on trade, particularly Chinese trade. Yet, until Monday, there had been a great deal of talk and no real action. While the move to withdraw from the Trans-Pacific Partnership was real, for example, it was more of a decision not to open the U.S. economy further, rather than to close it.

A negotiating tactic?

The Monday announcement is the first step toward real action. But for all the headlines, the impact is likely to be less than it appears. In all likelihood, these tariffs are a negotiating tactic. A trade war is in no one’s interests, but the rhetoric around negotiations can get very heated before pulling back. We are seeing signs of that in the NAFTA talks between the U.S., Canada, and Mexico right now. These tariffs are presumably just an opening salvo in an attempt to renegotiate the terms of trade with these countries.

Another primary reason this is more of a negotiating signal is the selection of the targets. China’s share of the solar cell market in the U.S. is just over 10 percent according to the Wall Street Journal—hardly dominant. The damage to China from this would be limited. In fact, the Shanghai stock market was up on Tuesday. South Korea is the country principally hit by the washing machine tariffs, yet the Seoul markets also rose. Both of these countries are also key players in the ongoing confrontation with North Korea and, therefore, unlikely targets for really damaging economic measures. So, while these measures are real, they are also very limited in their effects.

Again, consider NAFTA. Fierce rhetoric is matched with steady negotiation—on all sides. The likelihood remains that, in the end, a deal will be cut that preserves gains for every country. We should read the tariff announcement with that in mind.

Too early to panic

It is, therefore, too early to panic. At the same time, aggressive tactics do raise the stakes, and this is a new level of confrontation. The fact that the North Korea situation is also in play further complicates the picture. The risks, while not substantial at the moment, are certainly more than they were last week—and could rise.

What I will be watching for over the next couple of weeks is how and when China and South Korea respond—and whether they choose to impose tariffs themselves or instead either negotiate further or take the process to the World Trade Organization. The first would be more provocative and could more easily result in a tit-for-tat series of actions that could be dangerous. The second would likely mean the status quo would remain in force.

Watch the situation closely

Markets don’t seem worried, either here or in the two other countries most affected. I think that is the right approach. The possibilities, however, do warrant more attention going forward. I will be watching this situation closely and reporting here on the blog as warranted.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®