The resulting vicious cycle will be very hard to stop. Even the WTO, which supposedly exists to prevent this scenario, has little power to intervene.
That means Kentucky distillers, Wisconsin dairy farmers, Floridian orange juice producers (and probably many others) will get swept up into a fight that was originally between Chinese and American steel companies.
Unlike a shooting war in which generals try to minimize civilian casualties, governments fighting a trade war want to increase the pain. It puts political pressure on opponents.
Reaction Time
The good news is, this should be self-correcting. The bad news: it could last a long time.
Historically, free trade—or the mild version of it we have—isn’t the norm. Protectionism prevailed until the last few decades.
Unfortunately, the benefits of free trade didn’t get distributed fairly. As Newton’s third law says, every action has an equal and opposite reaction.
The global reaction to these measures will take time to unfold, but with President Trump intent on blowing up current structures, it could get ugly.
What can investors do?
As I said last week, companies that depend on imports and/or exports will get hurt the most. The global economy is a giant, well-oiled machine that’s about to get gummed up. Keep your hands and feet away from the moving parts.