One of the top trending topics in world news right now is “tariffs and trade wars”, so it is no surprise that I have been getting a lot of calls from clients who want to understand what a tariff is, why it is causing a trade war and how it affects their investments.

A tariff is a tax that a government places on a group of imported goods. Tariffs benefit domestic producers of those goods because the tax essentially makes the imported version of the good more expensive. Any country can impose a tariff on goods from any other country.

The goal of tariffs is to make marketplace competition fair. Yet fairness is a subjective concept. When countries go back and forth with round after round of new tariffs on each other’s imports, the result is a trade war. This is what is happening between the US and China right now.

The trade tensions with China and slowing growth in other countries could put the brakes on the economy. Even though the US economy is still growing at a modest pace and unemployment is near a 50-year low, there are signs of economic deterioration and fears of an impending recession.

The US Federal Reserve has already responded to this by cutting interest rates in July and is expected to cut rates again as soon as September, to stimulate economic growth, as lower financing costs can encourage borrowing and investing.

The most concerning part is that in today’s global economy, a battle over tariffs doesn’t just impact the two countries involved. Other countries that have trading relationships with the US are getting jittery because they could be next in the line of fire. Everybody is nervous, including investors.

How do trade wars affect my investments?

As I have warned repeatedly in previous articles, do not follow the panicking herd over the cliff. The truth is, depending on what you are invested in, you are likely in for a rocky ride. The market will go up and down if the trade war continues to drag out or worse escalates, but instead of jumping off the roller coaster ride while it’s still in motion, stay in your seat and keep your seatbelts fastened.

Instead of panicking or overreacting, simply exercise caution going forward.

Investors should consider reducing any excessive credit risks by adding higher quality longer-dated bonds or bonds funds, or other conservative investments, such as repurchase agreements “repos” and other “repo-like” products, to their portfolios; while decreasing their exposure to lower-quality bonds, stocks or mutual funds/unit trusts that are invested in stock, or other risky assets.

Whether the trade war is quickly settled or gets far worse is something we are all going to have to wait and see. If these tariff and trade negotiations are making you anxious about your investments, or if you’re wondering if you should make some adjustments, talk with your financial advisor.

Toni-Ann Neita-Elliott is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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