The stock market reacts strongly to changes in trade policy, with the United States’ trade policies playing significant roles. The United States has been an economic powerhouse for decades, attracting investors and international businesses to its trade policies due to their impact on the stock market. Therefore, trade policies, such as tariffs, trade agreements, and embargoes, can substantially affect the stock market. This article discusses the impact of trade policies on the stock market.
Tariffs
Tariffs are levied on imported goods through taxes or duties, usually imposed by the government. Tariffs may increase the cost of imported goods, making them less competitive with domestically produced goods. This can lead to lower profits for companies relying heavily on international trade, resulting in a decline in stock prices. For recent updates on information related to tariffs, businesses can monitor the economic calendar this week. The calendar includes current events, such as the release of trade data, trade negotiations, speeches by government officials on trade policy, etc.
Tariffs implemented by the United States affect domestic companies and have a ripple effect on the global stock market. When the US levies tariffs on imported goods, it can increase costs for international businesses, resulting in declining profits and stock prices. This, in turn, can affect investor confidence and lead to a downturn in the global stock market.
For instance, the US tariffs imposed on billions of dollars worth of Chinese goods during the US-China trade war led to retaliatory tariffs from China, causing a decline in the profits of US companies with heavy reliance on Chinese imports. The resulting uncertainty and market volatility also affected other global markets, impacting the stock prices of international companies.
Trade Agreements
The stock market can benefit from trade agreements. Increased demand for US goods and services may result from eliminating trade barriers like tariffs and quotas made possible by free trade agreements. As a result, companies’ stock values may rise along with their revenues and earnings.
At the same time, trade agreements can affect market confidence and investor sentiment. When trade relations are positive, optimism and investment rise. Conversely, pessimism and a lack of confidence prevail in negative trade relations.
Recently, the North American Free Trade Agreement (NAFTA) replaced the United States-Mexico-Canada Agreement on July 1st, 2020. The USMCA included some prerequisites to lower trade barriers and increase demand for North American-made goods. Due to this, companies that rely on trade with Mexico and Canada have seen a boost in their stock values.
Embargoes
Trade embargoes are policies prohibiting or severely restricting trade with a specific country, set of countries, or regions. In the past, the United States has used embargoes as an instrument of foreign policy. One recent example is the embargo imposed on Russia following its annexation of Crimea and involvement in the conflict in Ukraine.
The US and its allies’ embargo on Russia significantly affected the country’s stock market. Individuals and companies in Russia were on the receiving end of the sanctions, as were vital parts of the Russian economy, like the energy industry. As a result, both the value of Russian enterprises and foreign investment in Russia plummeted.
Since the United States and Russia engaged in relatively little trade before the embargo, its effects on the stock market were limited. However, the sanctions affected certain American businesses with ties to Russia.
Tariffs and other trade policies enacted by the United States can have a major effect on the market. Stock prices may fall due to the impact of tariffs on inflation and corporate profitability. Reducing trade barriers through trade agreements can raise demand for US goods and services and boost company stock values. The embargo had minimal repercussions on the US stock market, but it did have a detrimental effect on many US corporations.
