Who started it?
The Trump administration has taken action against Chinese companies transferring intellectual property (IP) outside of the US. This has been a catalyst for a growing geopolitical confrontation between Washington and Beijing over its modern industrial policy which seeks to place China at the forefront of key global industries.
Further to IP theft claims, the US has investigated the negative effects of Chinese imports on numerous domestic industries and has threatened to impose more tariffs should China retaliate further.
It’s not just America vs. China
Under the White House’s protectionist ‘America First’ doctrine, the US has also investigated whether it faces threats to national security by importing aluminium and steel from traditional allies including the European Union, Canada and Mexico.
In retaliation, the EU has proposed duties on iconic American brands such as Harley Davidson motorcycles and Levi’s jeans, to which the US President was swift to suggest the lucrative European auto industry is at risk of punitive import tariffs should the EU retaliate.
Will anyone benefit from a trade war?
Companies worldwide are increasingly interconnected through complex global supply chains built in the post-War era. The biggest risk posed by trade tariffs, therefore, stems from the “secondary” impact of abrupt changes in input costs to these supply chains. Companies will likely be forced to raise prices on the shelf which will ultimately hurt consumers.
The exact effect of trade barriers will vary by company and nation depending on a number of variables including: the underlying goods targeted, the speed with which countries enforce retaliatory customs procedures, the agility of companies to redirect supply chains and adjust to demand, and the corporate willingness to absorb increasing costs by cutting into profit margins to remain competitive.
Despite EU concessions, parties on all sides have been standing firm and announcing their own lists of tariffs. We believe it is increasingly unlikely that substantial trade barriers can now be avoided.
What are the implications for the global economy and financial markets?
President Trump’s ‘deal making’ approach usually starts with headline grabbing, followed by conciliation once a mutually beneficial deal has been brokered. This has been recognised by many investors and current markets broadly reflect this opinion. While a few markets have corrected, notably in Asia, we believe this is more due to a lack of US dollar liquidity than a fundamental repricing for trade wars.
It is likely that markets could initially be led lower by uncertainty weighing heavily on business sentiment and investment. The structural importance of the US-Chinese trade relationship in the global economy means very few countries would escape the negative effects of rising trade barriers. Asian economies most at risk are those integral to the global supply chain and inextricably linked to Western trade, such as South Korea and Taiwan. Germany, Europe’s industrial powerhouse, is also at risk should tensions around auto exports escalate.
Further risk presents itself this summer, a period in which market liquidity is traditionally thinner. This could result in exacerbated moves in both equity and currency markets. We can also expect demand for safe-haven assets (i.e. government bonds) to rise as investors seek more defensive positions.