World stock markets are suffering from volatile trading mainly due to the trade war between the US and China.
But what is a trade war and what are the implications for consumers and investors.
Investment expert Nigel Green, chief executive of leading expat financial advice firm deVere Group offers his views on the impact of trade wars on the world economy in a video published online.
Here he explains how a trade war works and the likely result:
Why are the markets concerned about a trade war?
If you follow the financial news, you will see that Donald Trump has decided to take on China, and when he’s not taking on China, he’s aiming at Europe, says Green.
It’s protectionism. He’s trying to protect, he says, American jobs.
But in doing so, he could unintentionally cause inflation and inflation means that the economy stalls.
That’s what the stock market’s worried about.
What happens if the US increase tariffs on Chinese imports?
The world has had the benefit for 10 to 15 years of low cost Chinese goods.
Low cost Chinese goods has meant deflation, or to a large extent any inflation, has been subdued
Interest rates have stayed low, which has meant the world economy has done well.
If US President Donald Trump puts tariffs on China, which he certainly seems to be doing, then Chinese goods into America will be more expensive.
You have Chinese goods that are more expensive and American companies that were competing with them putting their prices up, so of course you get inflation.
How can inflation be controlled?
When you get inflation, the only ways a government can control it is by increasing taxes or interest rates. What tends to happen is interest rates increase.
When interest rates increase, people spend less. Why? Their mortgages are higher. Their credit card bills are higher. Higher interest rates mean consumers spend less money, which means companies do less well. Profits are not as good.
Companies that have borrowed find that higher interest rates make their borrowings more expensive.
Trade wars can be potentially damaging not to the country that has the tariffs but to the country that puts them on in the first place.
It’s a dangerous game and people are concerned about it.
How will the trade war end?
We like to think that Donald is a negotiator. Let’s hope he is negotiating and ultimately we end up with no tariffs or low tariffs and more free trade.
We want the world to trade. We want the world economy to be going quickly.
If the world economy is going quickly, then shares do well and investors do well and more jobs are created.
Protectionism is never a good idea, and I believe an open economy is always a great idea.
