If you are considering investing, you need to familiarize yourself with the major political developments occurring now in the world, because stock markets are as dependent on politics as they are on economics. The political event that has been influencing stocks for the second year already is the trade war between the United States and China. Like any war, a trade war creates chaos. It is, therefore, difficult to understand how to invest money in the time when the United Sates and China are trying to outdo each other in imposing tariffs on each other’s goods.

This is not to say, however, that you should refrain from investing while the USA and China are undermining each other’s economic growth and that you should wait around until they arrange a truce. Invest you can even in these turbulent times, but you need to do this with caution. We are explaining below how you can profit from the ongoing trade war between the world’s two largest economies. But first a couple of words about the trade war itself is in order so that you better understand why the investing strategies we are suggesting yield results amidst the escalating animosity between the USA and China.

What is Trade War?

During a trade war, a country imposes tariffs or quotas on imports, while targeted countries retaliate with similar forms of trade protectionism - a policy that protects domestic industries from unfair competition from foreign companies. If a trade war persists, international trade declines. As a rule, a country enters a trade war to protect its domestic economy and create jobs. By imposing tariffs on imported goods, it aims to give a competitive advantage to domestic producers of equivalent products. Domestic goods are always cheaper than imported ones and hence look more attractive in the eyes of local buyers. When local companies sell more goods, they expand and, consequently, create more jobs.

The only problem with this strategy is that it works only in the short run, only if a trade war does not carry on for long. When countries stick to guns, their economies suffer. With increased prices of imported products, starts inflation. People cannot purchase expensive products, and, as a corollary of a fall in the purchasing value of money, companies sell less. Not profiting, they start laying off their employees. With a prolonged trade war, a country’s initial goal thus remains unrealized: it succeeds neither in protecting its domestic economy nor creating more jobs.

Trade War between America and China

The trade war between the United States and China has been raging long enough to begin damaging both economies. But like any trade war, President Donald Trump’s trade wars had started with good, patriotic intentions. His concern is America’s trade deficit that amounts to $621 billion and is rated as the world’s largest since 1975. When he announced his trade war on China in 2018, Trump hoped to reduce the country’s trade deficit and, in so doing, create more jobs.

The President is right to blame America’s deficit on its excessive love for imported goods, including cars. Last year alone, the USA imported almost $648 billion in consumer products and exported only $206 billion of them, thereby increasing the existing deficit by $442 billion. America’s automobile trade was equally lopsided. In 2018, it imported $372 billion worth of automobiles and parts. By exporting only $159 billion the same year, the USA enlarged the trade deficit by yet another $214 billion. To reduce the deficit, Trump decided to impose a global tariff on steel, a tariff on European autos , and numerous tariffs on goods coming from China.

When Trump levied tariffs on Xi Jinping, the latter retaliated with his own tariffs on American products. Since then, the two countries have been bombarding each other with sanctions, causing damages to each other’s economies. And despite an occasional cease-fire and some sparks of amicability between the two leaders, the end of the trade war between the countries is nowhere in sight. A new wave of tariffs followed just this September. Trump increased tariffs on another $125 billion worth of Chinese imports. In response, Xi Jinping immediately issued tariffs on an additional $75 billion worth of US products.

Nor does the Trump administration plan to stop at these numbers. There are rumors that America will introduce new tariffs before the end of the year. It aims to institute tariffs practically on all Chinese goods and bring them subject to tariffs to cover half a trillion dollars. Xi Jinping is not expected to bend to Trump’s authority either. Analysts estimate that in December, China will impose tariffs on 69 percent of its imports from the USA. If these threats are brought into effect, the tariff rate on US imports of products from China will reach 24 percent. Tariffs on China’s imports of American goods will be even higher, jumping to 26 percent. Compared with China’s average tariff rate of 6.7 percent for other countries, its tariff on American products will be high indeed.

Meanwhile, American companies are losing thanks to the rising price of imported materials. According to the calculations done by Federal Reserve , Trump’s tariffs are annually costing every American family on average $1,245. In August, Goldman Sachs even expressed concerns about the country’s stability in the near future. If Trump presses his policies further, he may soon face recession, it said. Indeed, Trump’s trade war against China has already reduced gross domestic product by 0.6 percent. If we recollect that in 1930, Smoot-Hawley Tariff precipitated the Great Depression, America’s current prospects start looking particularly gloomy. History, as we know, has a tendency to repeat itself.

Investing in Times of Trade War

Desperate times call for special measures. If you want to invest while the USA and China are fighting to weaken each other’s economies, you need to weigh your investing options carefully. One piece of advice analysts give to investors during a trade war is to invest in small-cap stocks . Small-cap stocks are usually comprised of companies that derive their revenue mostly domestically and are thus hurt less by tariffs imposed on imported goods. Despite the hostility between the US and China, the majority of small-cap stocks were in positive territory during the whole year. Yet there is a caveat. No small-cap stock is entirely protected against the markets’ volatility.

But this is not to say that you need to cold-shoulder large-cap companies altogether. Not all of them decline during a trade war. You need to remember that the aim of any cold war is to increase prices on those products that are made abroad so that they become more expensive than domestic ones. Hence, it is mostly large international companies which sell and manufacture across the world that are usually negatively affected by tariffs. Those large-cap companies that sell and manufacture in the USA are likely to benefit from the current trade war and tariffs placed on their international rivals.

For the same reason, consider investing in other American stocks. Some sectors such as Healthcare, for example, are less affected by a trade war waged on imported products and may present a lucrative investing opportunity in such difficult times as ours. Small companies in the Technological sector is a good investment option, too, just as are stocks across the robotics and artificial intelligence supply chain. Because prices of commodities are always correlated with inflation, you are advised to invest in them as well and, in so doing, hedge your portfolio against an increase in prices and concomitant fall in the purchasing value of money. Such commodities as base metal, copper, and gold have been boasting a good outlook this year and should be put at the top of your investment list.

Although the ongoing trade war between Trump and Xi Jinping has the potential to undermine the economic strength of both countries, not everything is gloom and doom at stock markets. If you tread cautiously and consider your investing opportunities carefully, you will be able to reap rewards even as the two nations are losing fighting for economic and political supremacy.