A trade war involves nations imposing tariffs, which are taxes on imported goods. They can raise costs for companies that import those goods or export them, and they can hurt consumers, who pay higher prices. The longer a trade war goes on, the more likely it is to have negative effects on global economic growth and stability.
Trade wars can lead to recessions, supply chain disruptions, and political unrest. They can also raise national security concerns and lead to reshoring, which shifts production jobs back to domestic economies that offer lower labor costs.
The Smoot-Hawley Tariff, which raised import duties in response to a financial crisis, contributed to the Great Depression and helped give rise to extremism that influenced World War II. In general, trade wars have a negative impact on the global economy and can escalate tensions, which can elicit military responses.
Companies in the S&P 500, which often operate in global supply chains, are especially vulnerable to the effects of trade wars. They rely on raw materials from various parts of the globe and then assemble them into finished products for sale in their home markets, where they face stiff competition. The increased cost of importing those components can compress profit margins, and it can be hard to pass those higher costs on to consumers in competitive markets. In addition, the resulting currency depreciation makes US goods more expensive in overseas markets. This can hurt the profit margins of multinationals that sell abroad.
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