One thing you should know to start to the week – Trade Wars

Hey team

Feedback has been Monday can be better, so trialling something new for a while. Please welcome, “One thing you should know to start to the week”.

Trade Wars
Midway through last week, Donald “the douche” Trump announced he’ll be slapping a 25% tariff on steel and a 10% tariff on aluminium to any non-US company selling those materials to the United States. In retaliation, the European Union has threatened to whack tariffs of their own onto some of the more iconic American products including Harley Davidsons, Kentucky Bourbon and Levi’s jeans. Should the European Union do that, Trump said, on will go further tariffs to European manufactured cars

And so it has begun. A trade war, 12 months in the making. Stock markets the world over fell last week and, with some of the biggest trading nations yet to respond, including the all-mighty China, many are getting nervous as to just how bad this could get.

So first, what’s a Tariff
A tariff is an additional tax a government levies on imported goods to make them less competitive vs domestically produced ones. The tariff (or tax) is actually paid for by the buyer, not the seller, so the one which Trump is suggesting essentially increases costs for US firms.  Yes, that’s right, by applying a tariff to both aluminium and steel, it means that US firms who have been importing this stuff are going to face increasing costs which can only be baaaaad for their profits (hence why the stock market fell).

The idea behind it is to make domestically produced steel and aluminium more competitive, and it does that by giving domestic producers a head start from a cost perspective. So even if their wage costs are higher, their products won’t have this additional 10% or 25% cost imposed on them, whereas international producers will.  It’s quite the head start.

The funny thing about Tariffs
They are never in the best interests of the country which imposes them. In fact, they are never really in the best interest of any other country either. The country which adds to tariff ends up facing higher costs for the stuff which has the tariffs added to it and the countries which used to supply that stuff, no longer do, as they struggle to be competitive versus local industries.

So why do them? Because of politics. Tariffs help to protect domestic jobs, in industries which would otherwise be uncompetitive with global ones. That’s it.

Remember, one of Trumps largest constituencies during the election was the disaffected white man living in the rust belt states of the US. These are states which have seen literally millions of manufacturing jobs lost to overseas competition. With one of Trumps biggest “sales pitches” during the election being to bring jobs back to America, this is kinda, sorta exactly what we should all have been expecting him to do.

And maybe we did. What we weren’t counting on though was how other countries would respond to his antics. One things for sure, it’s going to be a very interesting week in international politics. Get some popcorn.

Anyway, that’s 5 minutes. Hope it helped.

Categories: General Finance, Macro Economics, Markets

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