Most readers will have seen the news over the past week of how Donald Trump said he would implement a 25% trade tariff on foreign steel. He also said that he would implement a 10% tariff on aluminium imports.
Of course, this didn't go down well with the countries that the US trades with. The EU threatened to impose tariffs and then President Trump promised a tit-for-tat tariff on European cars.
Trade wars sound bad. A trade war would be bad for a lot of people. Ultimately, consumers would be the ones paying more for the same products and that doesn't help their bank accounts in the slightest. Any short-term gain would instantly be wiped out from the negatives, the Trump administration seems to be ignoring the knock-on effects.
So, does that matter to us as Australian investors? What does the goings on in the US, Canada and EU have to do with us?
Well, firstly, it sends negative ripples through share markets. Australia is heavily connected with the rest of the world as an exporting nation. What happens in the rest of the world also tends to affect us too.
Share prices may be damaged but it's down to each individual business' unique circumstances to see if the underlying earnings will be damaged. It's unlikely that people will change their buying habits from Greencross Limited's (ASX: GXL) Petbarn or change their need for additional car parts from Bapcor Ltd (ASX: BAP).
People will continue shopping at Woolworths Limited (ASX: WOW) and continue getting their monthly data from TPG Telecom Ltd (ASX: TPM). Patients will continue going to Ramsay Health Care Limited (ASX: RHC) for top quality healthcare.
However, there are some shares that could suffer. Interest rates could go higher, hurting big four banks like Commonwealth Bank of Australia (ASX: CBA) unless they somehow manage to pass on those rates without increasing their bad debts.
International trade related shares like BHP Billiton Limited (ASX: BHP), South32 Ltd (ASX: S32) and Amcor Limited (ASX: AMC) could also see lower demand.
Foolish takeaway
Ultimately, I don't think trade wars are anything to worry about in the long-term. The next time the Democrats get into the White House they will probably undo most of what President Trump has implemented. It goes to show why investing in shares that aren't really related to economic cycles can be one of the best investment choices you can make.
