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Your investments can survive a trade war. Here’s how

Everything was ticking along just fine. The global economy was gaining momentum after years of stagnation following the Great Recession. U.S. stock markets were setting new records almost every week. American corporate profits were on the rise. Unemployment was near its lowest level in years. Consumer confidence was high.

Economists were talking about a classic Goldilocks economy, that had the potential to continue for some years despite gradually rising interest rates. What could go wrong?

Donald Trump, that’s what. His deregulation efforts and the tax reform legislation were seen as big wins for U.S. business. But then he started to get tough on trade and suddenly the future doesn’t look as bright.

None of this should be a surprise. Trump’s “Make America Great Again” slogan reeked of protectionism. His inauguration speech, in which he pledged an end to the “carnage” that hollowed out U.S. manufacturing, was a clear signal he was going to challenge existing trade patterns. His obsession with balance of payments deficits identified his major targets, with China at the top of the list.

Ever since he took office, Trump has acted to throw up trade barriers in an effort to rebuild American industry. One of his first acts was to withdraw from the Trans-Pacific Partnership. Next, he demanded the renegotiation of NAFTA. His government imposed huge tariffs on Canadian softwood lumber and Bombardier jets. He then moved to slap duties on imports of solar panels and washing machines to protect U.S. companies. Next came proposed tariffs on steel and aluminum, although most U.S. allies have won at least temporary exemptions from that.

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The stock markets took all that in stride. But when Trump announced last week that the U.S. plans to levy heavy import duties on a wide range of Chinese goods, the manure hit the fan. Amid worries of an escalating trade war that could affect the whole world, investors voted with their money. The Dow Jones Industrial Average fell more than 1,100 points in the two days following the March 22 announcement. Then over the weekend there were rumours of high-level talks with China that eased the tension. The Dow responded on Monday with a gain of more than 600 points.

Obviously, the markets don’t like trade wars. But given Trump’s protectionist view of the world, we are likely going to have one. If the history of the 1930s is any guide, that would inflict severe damage on the global economy.

That leaves the question of what you should do in these circumstances. Here are my suggestions.

Avoid trade-dependent companies. If you want to invest in the stock market, focus on businesses that are less likely to be affected by tariff battles. These would include utilities, banks, insurance companies, telecommunications companies, and real estate investment trusts.

Buy some gold. If the trade battles get messy, gold will benefit in two ways: as a safe haven in times of turmoil and as a hedge against inflation (high tariffs will drive up prices, feeding inflation). One of the easiest ways to buy gold is the SPDR Gold Trust, an exchange-traded fund that trades on the New York Stock Exchange under the symbol GLD. It invests exclusively in the metal itself – no mining stocks.

Hold cash. When the world takes leave of its senses, cash is king. With interest rates edging higher, some banks are offering decent returns on high-interest savings accounts. EQ Bank, an on-line entity, currently pays 2.3 per cent on its Savings Plus Account, and there is no minimum balance. Your money is covered up to $ 100,000 by Canada Deposit Insurance Corporation.

Perhaps what we’ve seen so far is political posturing and in the end the Trump administration will settle on more realistic trade policies.

But at this point I think we should be prepared if the rhetoric continues to escalate and translates into more protectionist measures. Trump seems to firmly believe that tariffs will somehow restore American manufacturing.

They won’t, but the lesson will be painful for all of us.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

TORONTO STAR