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Ask a Fool: Why Are Investors So Worried About a Trade War?

By Matthew Frankel, CFP® – May 17, 2019 at 12:00PM

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American businesses and consumers could feel the sting from tariffs.

Q: The stock market tanked after the 25% tariffs went into effect on $200 billion in Chinese imports. Why is the market so concerned -- doesn't this hurt China, not the U.S.?

It's true that China should feel the sting from the trade war more than the U.S. does. After all, we don't export nearly as much to China as they do to us.

However, there are a few things all Americans should understand about tariffs and the trade war in general.

For one thing, China isn't paying any tariffs. The American businesses that import Chinese goods pay the tariffs. This should certainly have the intended effect of creating declining demand for Chinese imports, and as previously mentioned, the U.S. imports far more goods from China than vice versa, so we do have the upper hand here.

The real problem that's affecting the markets right now is that these costs will be passed on to American consumers. In other words, if it costs a computer company $625 to import $500 worth of materials to make a computer, you can be sure that they aren't just going to absorb that increased expense -- they're most likely going to increase the price of the computer by $125 to compensate. After all, tariffs or no tariffs, businesses are there to make a profit.

The higher costs passed to consumers could then reduce demand for products sold by American companies, which is a main reason you're seeing such a negative reaction by the stock market, especially when it comes to companies that sell products made in China or with Chinese parts.

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