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What Investors Need to Know About the U.S.-China Trade War

By Motley Fool Staff - Updated May 30, 2019 at 3:33PM

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As trade tensions heat up, how do savvy investors cut through the noise?

A lot of uncertainty surrounds the escalating trade war between the U.S. and China. At times, it seems large portions of the two countries' economies hinge entirely on cutting a deal. But is your money safe? And how does a savvy investor follow the trade negotiations without getting overwhelmed? Here are some helpful pointers on how you can parse through the noise and understand what's important.

A full transcript follows the video.

Narrator: Investors have no doubt heard about the trade tensions between the U.S. and China.

Both countries are locked in a power struggle as they impose new tariffs on goods imported into their countries.

But determining exactly what a trade war between the U.S. and China means for the stock market, or either country's economy, is difficult to predict.

To understand its significance, it's worth taking a closer look at what the U.S. and China are fighting about and whether or not it should change your current investing strategy.

So, why are the U.S. and China imposing new tariffs on each other?

Back in 2017, the U.S. began looking into China's trade policies and decided that the deficit between the number of goods coming into the U.S. from China compared to the amount being exported to China was too great.

The U.S. government then imposed billions of dollars in tariffs on some Chinese goods coming into the U.S. and, in return, China issued its own round of tariffs on some U.S. imports.

The two countries have held talks trying to resolve the trade tensions, but they haven't resulted in any long-term solutions.

Why exactly does this trade war matter to investors?

When new tariffs are applied to products, it's not the countries that actually pay for them. The companies that sell the products pay the additional cost up front, and they then usually pass the expense onto their customers.

For example, prices on some electronics that are manufactured in China and then exported to the U.S. could rise as a result of the tariffs, which could cause certain device prices to rise.

If that happens, sales from U.S. tech companies could fall. Not only that, but the higher cost of devices would likely cause Americans to curb their spending.

And rising tariffs on U.S. goods being exported to China means that companies in that country could increase their prices as well, and Chinese consumers could suffer in the same way U.S. consumers are.

China and the U.S. have two of the biggest economies in the world, and the International Monetary Fund has warned that an all-out trade war between them could hurt the global economy.

Because of this, trade war tensions between the U.S. and China have caused some volatility in the stock market. But that doesn't mean that investors should panic and sell their stocks.

The trade negotiations aren't finished yet. Which means that selling stocks before any trade deals are made is just selling based on fear.

Keep in mind that over the long term, the stock market has produced strong returns even in the face of wars, depressions, recessions, and other negative events.

In fact, the current trade war is actually creating some new investing opportunities.

As investors flee the market, it's pushing some share prices down and allowing savvy investors to snatch up companies at bargain prices.

There's still a lot of uncertainty about what will happen with the U.S. and China trade negotiations, but the one thing investors should remember is that, for the most part, it's best to stay the course with their investments -- and be on the lookout for bargains.

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