Global Stock Markets Impacted by Trade War

The trade policy between America and China is facing a tumultuous period. Although President Trump initially promised better trade agreements and more benefits for the U.S., he has realized that it isn't as easy as he once thought it was.

What led to the Trade War?

The current dispute first started in 2018 when the U.S. imposed an initial 15% tariff on Chinese imports to incentivize American companies to manufacture in America. China retaliated with tariffs of their own, hampering global oil prices at the time. To this day, neither country has retreated, and the conflict has only escalated.

However, America's conflict with China is valid. China is notorious for not respecting intellectual property and has forced tech companies to have their products and services to be co-opted with Chinese companies. Despite such disadvantages, most international companies have no choice but to comply, since China is the world's cheapest place to manufacture and export products. The cost savings are hard to ignore. Moreover, China is also the world's second-largest economy with a rising middle class, and is responsible for global growth, providing many revenue opportunities.

What is the Current Situation?

President Trump had intended to force China to respect I.P. laws, reduce state support for its companies, and lower tariffs when he first came into office. But tensions between the two countries have only gotten worse, resulting in global exchanges experiencing spontaneous volatility. The largest stock exchanges carry multinational companies that rely on both China and the U.S. for demand, supply, and manufacturing. Thus, swings of 2 to 5% points have occurred in single trading days based on announcements from both parties.

The tensions between the two largest economies have also led to changes in the markets. Companies have either delayed or canceled investment plans, depressing performance. According to the U.S. Fed, in 2018, the uncertainty in trade policy resulted in U.S. investment lowering by 1%.

Based on the stock market responses triggered by the trade war, the direct effects vary between about -4% to +9%. U.S. tariffs are usually favorable for U.S. firms but harmful to Chinese firms. However, researchers have found out that there is a significant amount of unintended adverse effects of the tariffs on U.S. firms and positive effects on Chinese firms. Meanwhile, China's retaliatory tariffs also have unintended consequences, but at a nontrivial frequency.

Figure 1 shows the effects of direct trade war tariffs on stock market prices for firms in percentage.

The indirect effects of the tariffs tend to be much smaller than the direct ones, at approximately 5%. They are primarily skewed towards the negative, and more significant for U.S.'s tariffs than for China's.

Figure 2 shows the effects of indirect trade war tariffs on stock market prices for firms in percentage. 

The U.S. listed companies believe equity prices will lose an estimate of 6% points, equating to a $1.7 trillion reduction in market value.

Due to the impact of the trade war on global stock markets, the two nations have agreed to discuss a new trade deal in different phases. They have already concluded Phase one, but alterations may have to be made due to the COVID-19 pandemic.

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