Ask a Fool: Is a Trade War Good or Bad for Stock Investors?

Q: The Trump administration's trade war with China has officially started, and we seem to be on the brink of similar events with most of our key trading partners. Is this a positive or negative factor for U.S. stocks?

On the surface, it may seem like U.S. corporations would be a big winner of President Trump's tariffs. After all, if imported goods become more expensive, U.S.-made goods would become more competitive, and the companies that make them should sell more, right?

Well, not really. There are a few reasons why a trade war will likely be an overall negative factor for U.S. stocks.

For one thing, many U.S. companies do a substantial portion of their business overseas. For example, heavy equipment maker Caterpillar generates about 60% of its revenue outside of North America. Retaliatory tariffs could be devastating to these businesses' international sales.

Furthermore, many U.S. manufacturers use foreign-made materials to make their products. As material costs rise due to tariffs, it makes production costs more expensive, and this will undoubtedly be passed to the consumer.

Toyota, for instance, makes the Camry sedan in the U.S., but cautioned that proposed tariffs could result in a $1,800 price hike per car due to the increased cost of the parts used. Rising prices generally lead to lower sales, which is bad for stocks.

Finally, consumers could feel a sting. These rising prices could cause inflation to heat up, which would likely result in higher-than-expected interest rates for consumers.

The bottom line: A trade war will hurt international business, make products more expensive for consumers, and could even make it more expensive to borrow money. That's a bad recipe for stocks.

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Matthew Frankel owns shares of Caterpillar. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.