Companies That Rely on Foreign Trade to Make Profit Likely to Suffer Losses in the Event of a Trade War

Published on: 27 Mar, 2018

The proposition to impose tariffs on steel and aluminum imports has sparked rumors about a possible trade war. A trade war ensues when countries try to protect their local businesses by imposing tariffs on imports from other countries. A trade war can affect the pace of global economic growth and lead to a possible recession.

A trade war results in reduced GDP growth and limited sales of goods and services. Both consumers and business will be on the blunt end of such difficulties. A trade war can cause the profit margin of several businesses to decline unnecessarily. This, in turn, can affect the 401(k) balance.

Just last week, the Dow Jones Industrial Average happened to fall by a figure of six percent. An all-time low since January 2016. The Dow fell as a result of the frenzy created by investors selling their stocks in fear of an impending trade war.

President Trump has proposed a tariff of $60 billion on goods made in China and the Chinese government retaliated by proposing to impose tariffs of $3 billion on all goods made in America. This includes tariffs on fruits, nuts, and wine.

Trade wars and high tariffs can increases the expenses incurred as goods cross the border. This, in turn, restricts sales and buying activities.

This is detrimental to companies based in the U.S., especially those companies that make profits by selling their commodities abroad. Aircraft manufacturers and companies selling defense goods are at stake in this situation.

Companies like Boeing are highly likely to be hard hit in the event of a trade war. According to reports, Boeing made more than half of its profit through foreign sales the previous year. In addition, 11 percent of the company's annual sales come from China.

Trump's proposition to impose tariffs has blithely affected Boeing sales and shares have been down by 11.4 percent since the announcement.

It is evident that if a company happens to rely more on foreign trade for its profits, it is likely to suffer more during a trade war. This applies especially to companies that rely on exports to China for profits. This means that a large number of companies that stand to make 10 to 30 percent of their profit from China is on unstable ground.

Apple, which makes more than 22 percent of its revenue through sales in the Chinese market, has seen a decline in their shares.

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Danny Abramov

Email: danny@financialinsiders.com

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