U.S. China Trade War Explained: How Tariffs Work & Impact the Economy

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.

------------------------------------------------------------------------
Subscribe to The Motley Fool's YouTube Channel:

Join our Facebook community:
Follow The Motley Fool on Twitter:

[tjeanneret]

Please, we don't need any soundtrack on your videos, the topic is appealing enough.

[donaldkarpick]

Agree that the background music is too loud, making it difficult to get the point of the video.

[Waynole]

This video totally missed the intellectual property theft issue. To me that is the biggest issue we face in dealing with China. No one has had the guts to face the Chinese and call them out on this terrible practice until now. We are doing this from a position of strength and I believe we will win. No more cheap Chinese crap for me.

[jackiek]

The music in this YouTube is intrusive and LOUD!! We don't need that kind of sound so PLEASE delete it. JKendziorek

[chasekparker]

What does David have to say about the Antitrust Probes making these techs drop? Is this noise or is this damaging?

[meriseath]

bro how the hell am i supposed to concentrate with that banger in the background?

[vuthchandara]

Your music background is too loud comparing to the voice over! Please lower it in next video onward.

[Mike-uswr]

Fallen into the trade trap for too long. No short term painful adjustment, no long term solution and only getting worse.

[JH-tkge]

0:45 "US spending too much on Imported Goods from China". I think I know what you meant here, but it is a little misleading. The US consumer benefits greatly from cheap Chinese labor and sufficient quality products. The US benefits much more so, on an abstract level than vice versa. You were talking about the ratio of imports to exports? Correct? I don't think its an accurate reflection of the unseen benefits of the US essentially subsidizing their manufacturing labor force with Chinese workers. We get all the goodies, for cheap, and no pollution!

[tjeanneret]

I note that there is a strong correlation between Trump's actions and the market's fluctuations. Up to the point that I am asking myself wether it could be possible that it takes advantage of these moves. After all, nothing has really been done on the political plateform...

[anichris]

hard to follow because of the annoying loud music

[standicarlo]

This could be a good video but the bass is so loud I can't even concentrate on what's being said

[AltKuyperian]

Prices rise in the U.S. for Chinese goods, motivating purchase of American goods and incentivizing companies to keep their products made in the U.S. Where is the addressing of this side of the issue? Do we really want to be dependent on a country that hates us?

[JSOO]

I do enjoy the info you have to offer but I also am having trouble concentrating on your info with that annoying music or sounds or whatever it is. The person reading the script sounds like one of those guys trying to sell you his get quick rich program on how he didn't have a penny to his name and then one day before lunch he took 10 cents and turned it into a million dollars.

[claws]

can you post your updated thoughts on this topic after today's bold move by Trump?

[theknight]

1:06 WTF? Why do you have Tajikistan and Kyrgyzstan in China??

[yacobcastro]

I lost 5% of my portfolio today...this has got to end.

[dejabu]

is good for countries around china that could get the companies that will outsource their production there, other companies could also go back to the US, China will loose eventually, the US economy is doing very well and price increased wont affect that much

[vasanthipillay]

Your background music is WAY TOO LOUD and annoying .... I can hardly hear what the narrator is saying and could not watch for more than 1 min as it was jarring to my ears .... don't you guys listen to your own videos before uploading them????

[tywinislitandeddard]

Guys please help!
I am doing a school project on this and want to know which country is the trade war hurting more. Pls could you include valid statistics