The term “trade war” is widely known. Special popularity came to him for the period of 2018, when there was a confrontation between China and the United States. As a rule, a trade war is called the rivalry of several countries (from two) on economic grounds. We will talk about this in more detail later. And now I propose to understand why there is a trade war, how it proceeds and how it affects investors.
What is the reason for the trade war?
The answer lies on the surface: because one country is not satisfied with the situation on the world stage of any other. I propose to take as a basis the fictional countries: Atlantis and Sokovia. Let’s say that Atlantis has been leading the world for several centuries. It has the best technological progress, economic condition, standard of living, and so on. In short, it is a powerful state. Muscovy was a country of average scab, but the last half century has begun to actively gain momentum. Here, both new developments and economic reforms that improve the life of the population began to gain weight on the world stage. But the most important thing is that Sokovia is the main exporter to Atlantis for several groups of goods at once, receiving a lot of money for this. It is clear that the Atlantean apparatus cannot like this state of affairs and the following happens: sanctions are applied against Sokovia, which imply a complete or partial ban on the sale of its goods on the territory of Atlantis.
In fact, the story could have ended here, if not for one thing: Sokovia is one of the largest miners of valuable minerals that are needed not only by Atlantis, but also by the whole world, too. Therefore, the Sokovia apparatus imposes retaliatory sanctions, according to which everyone who buys valuable minerals from them cannot resell them to Atlantis. You can develop the story further, but there is no point in this. There is no specific reason for the emergence of a trade war, but as a rule it is: trade duties, supply volumes, prices, details of licensing of goods, the use of any technologies, and so on. It’s just that at some point one country begins to be dissatisfied with the situation of another – this is usually enough.
Interestingly, the first trade war dates from 1840. An opium war took place between China and a number of European countries. Back then, the heavenly was the chief exporter of porcelain and silk. But in return, Western countries could offer nothing but money, so our Asian friends were a little cheeky and overvalued. Naturally, this could not have happened for long, and Europe found a way – opium. The United Kingdom has developed production and production of drugs in India and has literally invaded China. As a result, there was military intervention or war. It ended with the defeat of China and the signing of a treaty beneficial to the United Kingdom, with Hong Kong Island ceding to it, and trade available in all ports below ground. It was in those years that China experienced a massive spread of drug addiction and a massive extinction of its population. It turns out that a trade war can easily spill over into a conventional war, with multiple victims.
And what should investors do?
To my great regret, there is no exact answer here. There is an opinion that if you are a conservative investor (you have invested for a long time), then your funds are not in danger. As a rule, the correction against the background of a trade war is temporary, that is, prices do not sink forever. However, if you decide to earn extra money on the news at the moment, then everything can end in failure.
For example, in May 2019, China imposes retaliatory sanctions against the United States, the stock market reacted with a powerful drawdown. According to average calculations, the US stock market sank by $1 trillion in a day, Apple and Tesla lost 5% of their capitalization, and the Nasdaq updated the annual minimum. Now let’s take the minimum price of Apple shares in May 2019 – $42. On New Year’s Eve, their cost rose to $73. The same picture is with Tesla: May 2019 – $35, for the new year – $79. As we can see, there is an increase in the long term, and if we compare it with prices in 2021, it is significant.
If we talk about instant earnings, then the situation is somewhat different here. There is one interesting phrase that fits very well here: “If you read in the newspaper that you need to invest in some asset, it’s too late.” Usually young investors neglect this, thinking that they are the smartest of all. In fact, the so-called insider information is available only to a small circle of people who have already used it, and an ordinary investor will never know about it. In addition, the expected outcome of events can be predicted by analysts of large hedge funds – this is their job. In all other cases, investors simply lose their money in an unstable market process.
Examples of trade wars
The Second Opium War
At the beginning of the article, we talked about an opium war, but there was also a second war, which started 20 years after the first. The British felt not only that they had seized the island and had access to the opium trade in Chinese ports, but that they were actively seeking a way to resume the war in order to increase their influence over the country. The reason was a smuggling vessel that had been hijacked by the Chinese authorities. As it turned out, the ship belonged to the United Kingdom, so the new conflict did not take long. Negotiations began in 1860, but not only between Britain and China, but also between France and Russia.
Based on the new agreement, China opened all remaining ports for trade to foreigners. On the territory of the country, illegal immigrants caught could not be convicted: they had to be transferred to local consulates, where they were already deciding what to do with them. In fact, the Middle Kingdom became a paradise for the sale of opium: Europeans could do it with impunity. The Emperor of China delayed signing this treaty for a long time, so in the middle of 1860, the Anglo-French army came to the imperial palace in Beijing and defeated it. This led to the imposition of indemnity payments for European countries, and it also became possible to export Chinese from the country and sell them as slaves.
Now the sale of opium in China has become legal and Europeans could not get enough of the fact that they can rob the country with impunity. Only the joy was short-lived: soon there was nothing to rob. China was slowly but surely turning into the corpse of a once great power. Opium began to be grown right on the territory of the Middle Kingdom. Mao Zedong volunteered to stop the total genocide of the Chinese Empire. Thanks to extremely harsh measures (the execution of large traders, and small ones began to work for the state), he managed to rescue the country from opium captivity.
Smoot-Hawley Tariff Law
Tariff Law of 1930. The law implied an increase in tariffs for the import of more than 20,000 imported goods. As the story goes, it was signed with one goal: to increase the competitiveness of domestic production over other countries. In those years, the Great Depression was just beginning, and widespread unemployment was emerging in the country. According to the state, the reason for this was a large number of imported goods on the US market. To avoid this, a tariff law was adopted.
However, everything did not go according to plan: importing countries that fell under the tariff law began to impose retaliatory sanctions. US imports fell from $5.4 billion to $2.1 billion in just a year. As it turned out later, at the time of signing the law, unemployment in the United States was 8%. And by 1932, when it was decided to abandon the tariff law, it was already 25%.
The Americans had the following plan: they raise tariffs on the import of a huge amount of products from other countries. Due to the internal shortage of essential goods, there are jobs that are sponsored by the state. Together with import substitution, it was planned to produce goods for export, the income from which would help avoid the development of the Great Depression. And the plan was good until the moment when retaliatory sanctions fell.
Sino-American Trade War
We have heard about this most often in 2018. Although, according to many experts, the trade war between the world’s strongest economies is not over even today, the US has already changed its president. There are two main reasons for the start of this event:
- Trade deficit. In the United States, in 2017, it amounted to $800 billion, of which $ 500 billion is accounted for by China. Then Trump just came to power and immediately began with a showdown with the Middle Kingdom. According to him, China takes 25% from each imported American car, and the United States takes only 2% from each Chinese one. Against this background, America said that China is conducting an unfair trade policy, which, of course, they have their own law: “The Trade Law of 1974, which implies the introduction of restrictions on trade with other countries if they were seen as an unfair trade policy.”
- Made in China 2025. The essence is as follows: the government of the People’s Republic of China has set a national task that by 2049 (the 100th anniversary of the People’s Republic of China, although it is not clear what 2025 has to do with it), the country should become a world leader in the production and development of information technologies, medical equipment, aviation, robotics and cars. In short, China is encroaching on the hegemony of the United States. And let’s just say that the process in China is going well, because they have achieved certain results 10 years earlier than planned.
It was interesting to watch the course of this trade war. As soon as the US imposes the next sanctions, China immediately responds in kind, with a delay of a maximum of a day. There is an opinion that in 2021 the trade confrontation between the two countries will continue, because quite recently there was news: Joe Biden calls for European countries to unite to fight Russia and China.
It is interesting to observe trade wars from the point of view of what the leaders of countries are capable of in order to consolidate their dominance on the world stage. However, in world history there were examples of trade wars that turned into real ones and were the cause of almost the death of an entire country. Given that the United States likes to achieve its goals at any cost, let’s hope that there will be no repetition of historical examples.