You probably noticed that when President Trump recently declared a trade war against China, it triggered sharp downturns in the stock market.
But what exactly is a trade war and what really is a trade deficit?
A trade deficit is a monthly calculation made by government economists. The value of products manufactured in China that are purchased in the U.S. are subtracted from the value of products manufactured in the U.S. that are purchased by Chinese consumers.
Simple math tells us that Chinese manufacturers are taking more dollars from U.S. consumers compared to U.S. manufacturers taking dollars from Chinese consumers.
But, this simple math doesn't really tell the whole story and ends up with trade deficit figures that probably aren't as accurate as we are made to believe. Let's take a simple example, like the Apple iPhone.
Apple has its phones manufactured in China and then ships them to the U.S. for sale. The value of all these smartphone sales count as a Chinese export to the U.S. market.
But wait a minute, Apple is a U.S. company generating huge profits from the sale of its iPhone. In addition, the design of the phone, and the software that runs it, were all created in the U.S. and are a large part of the value of the phone itself. However, this isn't reflected in the trade numbers.
Many economists don’t think a trade deficit is a bad thing in the first place. You probably run a significant trade deficit with your local grocery store.
You give them some of your money and in return you import some of the food from their shelves to your kitchen table. But I'm guessing the grocery store doesn't import much, if anything, from you. So, are you harmed by this trade deficit with your grocery store?
Tariffs are simply a tax on specific items when they cross the border. Anyone buying those products will see their taxes go up invisibly by an increased cost of the product itself.
So far, none of the tariff’s announced by the U.S. or China have been put in place. In other words, no actual shots have been fired in the trade war, so it's really not a war at all – yet. The U.S. and China are just trading lists of potential trade targets.
Remember how worried the financial markets were when the Trump Administration made a surprise announcement with tariffs against global steel and aluminum? Well, as it turns out, 50 percent of all U.S. steel imports were exempt from those tariffs.
Our guess is, if and when the time comes to actually fire those shots - impose tariffs - the most likely scenario is lots of exemptions that leave us with the status quo.
Not over-reacting to trade war headlines will move you one step closer to experiencing your version of an Incredible Retirement – doing what you want, when you want with the resources you already have.