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Trade Barriers Could Reroute Money Away from U.S.

May 28, 2018

President Trump is going after China in a budding trade war. Debate the merits of that all you want, but as we know, most times consumers lose no matter how it shakes out.

 

Investors can lose too because financial markets don’t want barriers in place restricting trade.

 

The president says he doesn’t like trade deficits, hence the tariffs.

 

But is it really a zero-sum game, where if one wins, another must lose?

 

The fact is, deficits are normal. Some countries import more than others.

 

And in the case of us and China, aren’t we trading things we both want? U.S. consumers want televisions, phones and other items China makes.

 

And China wants our dollars.

 

Is that a bad thing? Either way, it’s reality.

 

The Chinese don’t mind. Their bank accounts are loaded with U.S. dollars, and they’re investing in our Treasury securities (China is our largest foreign lender).

 

Clearly there’s an entire cycle at work here. Does that need to be thwarted with a trade war?

 

The other factor at play is that we spend more dollars as a country than we take in. It’s a topic for another day, but make no mistake, our rising debt does not help us in this trade matter.

 

Instead, it means we need to sell bonds. And China is a natural buyer.

 

This could all change with a prolonged trade war. China can buy from other countries and enact tariffs on U.S. goods and services.

 

Many see a budding trade war as bad, knowing that attacking a nonproblem could create real problems.

 

However, fervent Trump supporters could see it as a good thing – as “winning.”

 

But, if prices rise and our portfolios shrink, how is that winning?

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