What Mid-term & Short-term Impacts US-China Tariff Row Has on Investors?

The continuing US-China tariffs dispute has already shown ramifications across the market and investor mood is swinging between short-lived momentum and abstinence. No wonder, the possible impact is catching the news headlines now and then. While the US stocks instantly started showing bearish signs following the US President Donald Trump’s announcement, it found a slight relief when the decision was postponed for 30 days. Where do traders stand amid this escalating US-China trade war? To put it more precisely, what is the mid-term and long-term impact of this ongoing US-China tariff tension? Let’s explain. 

Short-Term Impacts

Short-term impacts such as increased volatility and price movements are already visible. Investor sentiment is also switching to and fro between panic and cautioned optimism. Let’s have a high-level run through these short-term impacts.

• Heightened Market Volatility

The Trump tariffs imposition move immediately had a seismic effect in many markets around the world. But the volatility also opened up opportunities for the intra-day traders to capitalize on the price movements.

Altogether the market reactions were mixed in character while the drop of major market indices around the world hovered around 0.2% (FTSE 100) to 0.5% (DAX). Dow Jones Industrial Average and the S&P 500 also experienced downward momentum, while Hong Kong’s Hang Seng and China’s Shanghai Composite registered 0.9% and 0.7% declines respectively.

• Fluctuating Forex Market

The trade tensions led by the tariff effects instantly led to multiple fluctuations in the forex market. While the US Dollar continued to hold strong market positions, there were immediate concerns about the retaliatory measures to be taken by the Chinese authorities. On the other hand, there were also concerns about the mounting inflation pressures on the US economy. At the time of writing this post, USD is continuing its strong position, despite the retaliatory bans of China on select US commodities.

• Commodity Price Movement

The new US tariffs immediately led to price adjustments in global commodity markets. Despite the ongoing turmoil around price adjustments, gold achieved its all-time high peak position. With China imposing tariffs on US crude oil, liquid natural gas (LNG), and coal, the tension around the trade war can further escalate making way for more volatile investor sentiments. There is already a sustained negative reaction in global markets concerning the major stock indices and commodity pricing.

• Investor Sentiment

The most obvious short-term impact that is observed following the new trade war is the eroding investor confidence. While seasoned investors are holding their bets around price movements, the overall investor sentiment tends to be negative. Following the postponements of the US Tariffs for the next 30 days, many investors also found a silver lining within this mounting trade war tension. The recent market recoveries have been a significant proof of this.

Mid-Term Impacts

The mid-term impacts of the US-China tariffs row that may not instantly influence market opportunities and trading decisions, but can shape the market dynamics in the months to come, are also significant. Let’s have a sweeping look at the key pointers of this mid-term impact. 

• Supply Chain Reconfigurations

If the tariff imposition is prolonged, it can ultimately make businesses renew their supply chain structure to mitigate the additional cost burden. Some of the major ramifications that are expected in a few months from now include relocation of manufacturing facilities to countries having more favorable trade relations with the US and supply chain diversification to reduce dependence on a single manufacturing hub. While these reconfigurations and adjustments can reduce the immediate impact of the imposed tariffs on the bottom line, this can lead to major implications for investors.

• Pressure on Corporate Earnings

Sustained pressure from newly imposed tariffs can also lead to decreasing profit margins for many companies. The companies relying more on international trade, particularly the large corporations engaged in the import-export of raw materials, will suffer the most. The enhanced cost burden caused by the tariff imposition may finally create an overload on the market pricing, making consumers suffer. This can have a bearish impact on consumer demand, impacting business revenue further. This is why investors must carefully study the corporate reports on earnings to assess the post-tariff impact before making investment decisions.

• Inflationary Trends

One major area where the imposition of tariffs can have an alarming impact is the increased prices of imported goods. This will contribute to rising domestic inflation, and in the context of the US market, this impact can be significant. This inflationary trend fueled by the escalating trade war on tariffs can greatly influence the policy decisions of the US Federal Reserve. The inflation catching up with this upward trend can hurt consumer purchasing power and, in turn, lead to lower investment returns.

• Industry-Specific Impacts

Not all industries will bear the impact of US-China tariff tension in the same manner. Some industries can be more vulnerable and have a more direct impact, while some sectors can experience less severe effects. The technology sector, comprising both IT services and goods, is more dependent on global supply chains, and any disruption caused in the supply chain can ultimately impact the sector negatively. On the other hand, domestic technology companies can benefit from this, as disruptions at the global level may drive businesses to rely more on IT service providers and IT products developed locally. This can be a strategic shift call for investors from global corporations to domestic companies.

Key Strategic Considerations for Investors

Now from all the above-listed short-term and mid-term impacts of the imposed tariffs and their ramifications across the industries and their market positioning, we can easily discern some strategic shifts and changes that shortly investors have to be mindful of. Let’s have a quick look at these key strategic considerations that investors need to have. 

• Call for Strategic Diversification

Strategic diversification always offers a safeguard against market volatility risk factors. But now you have to be more focused on diversifying your portfolio based on the implications of the supply chain disruption in different regions. You can also avert risks associated with tariff imposition by spreading the portfolio across different asset classes, industry domains, and geographic regions. In this way, investors can avert the negative impact of the tariff tension in any specific area.

• Closely Tracking Policy Decisions

In times of such turmoil caused by policymakers of trade powers, investors need to be watchful of the policy decisions taken by the various governments and federal agencies. Since trade policies of various countries and global corporations will focus more on adjusting the risk factors through their trade and financial policies, investors should be informed about them.

• Assessment of Company Fundamentals

Not all companies will be exposed to the same level of risks and vulnerabilities because of the differences in their fundamentals. Investors should assess how much a company is exposed to international trade and global outsourcing. Companies with strong fundamentals in balance sheets and existing strategies to address such escalating tariff challenges can stay afloat despite the tensions. For example, companies that have already diversified their supply chains beyond the regions where the impact of this trade war is more obvious have better chances of coping with the challenges.

• Don’t Undermine Defensive Investments

When uncertainty and risk factors are too obvious in the market, investors can always use reliable safeguards like investing in defensive assets. Some assets like gold and government bonds are known for their stabilizing characteristics and are great financial tools to lower the impact of market volatility on financial prospects. 

Ending Notes

Undoubtedly the US-China trade war fueled by the tariff imposition is making the investment scenario more complex. The mid-term implications we described above already suggest that investors need to be prepared for the far-reaching implications of this continuously escalating trade tension between the US and China.