Please ensure Javascript is enabled for purposes of website accessibility

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

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.