As US tariffs on Chinese goods, as well as the retaliatory action, take effect tomorrow, four investors assess the potential consequences of a protracted trade war and discuss whether there is scope for a more subdued outcome.
Larry Lau, manager of the Trium Diversified Macro fund
International trade is a big deal. Donald Trump’s manifesto is to bring fair treatment by US trade partners, and we cannot fault him for trying. His methods seem dramatic, but his actions appear to be getting people to the negotiating table. The stakes are high and divisions within the US administration are clear to see. It is a complex situation, because Trump is engaged in a simultaneous economic chess match against many countries who are allowed to collude.
Given the lopsided trade surplus – some $350bn of net exports – with the US, one expects China to be concerned by an escalation in disputes. However, in the long-run the Asian giant is arguably better placed to redistribute trade flows. The odds are still on an agreement that improves US trade terms and in the detail is tolerable to China.
Global markets have been somewhat influenced by the rhetoric – negative on equities and commodities. The current disparity in global rate cycle together with the bedding-in of substantial debt-funded fiscal policy is dollar supportive and doing the US current account no favours. China is happy to lean on this open door through its exchange rate management. Expect near-term volatility and strong reaction as markets sniff a resolution.
Joseph Amato, president and CIO – equities at Neuberger Berman
When the US-China trade rhetoric turned sour in March, we acknowledged this was likely to dominate the news headlines throughout 2018, but unlikely to be the big driver of market sentiment. However, the noise has gotten harder to ignore these past couple of weeks and it certainly has dented market confidence.
Risks are rising from this game of chicken. Markets are not yet ready to trust the Trump administration on trade negotiations. The next few months will be a vital proving period for that trust, during which the noise and anxiety are likely to increase. We still believe the two biggest players are likely to swerve from their collision course and avoid a truly damaging outcome.
Both sides have an incentive to back down in a way that saves face. That incentive is particularly acute for President Trump, looking for strong headlines leading into the November polls. Some argue China’s initial offer to ramp up its purchases of US goods was not only a little too vague, it simply came too early and too easily for the White House to accept. It would have lacked the drama of taking the game of chicken to the brink. When the timing is more propitious, the argument goes, a similar offer with more detail and clearer enforcement mechanisms will break the deadlock.
Hartwig Kos, co-head of multi-asset and manager of the Oyster Diversified Fund at SYZ Asset Management
Donald Trump’s negotiation style is nothing short of bullying. In the spirit of his book, ‘The Art of the Deal’, he keeps on pushing and pushing and pushing to get what he is after. This served him well when he built his property empire in the 80s, but applying it to international affairs is a bit more difficult.
The problem with this attitude is international trade negotiations are different to dealing with a bunch of contractors. There are unintended consequences and feedback loops. Besides the retaliatory measures, tariffs have as much of an economic impact on the US economy as on the countries they are imposed on. The person that ends up paying is the US consumer in the form of higher end-prices. That is what tariffs are: hidden consumption taxes.
So, unless he treads more lightly, Trump might, instead of ‘making America great again’, end up only making it greatly expensive for his electorate.
Arno Lawrenz, global investment strategist at Ashburton Investments
While Trump appears intent on promoting the idea national interests are at the heart of his tariff decisions, it does increasingly appear as if it is playing more to the Trump agenda than anything else.
It may seem strange to think of the appointment of John Bolton as National Security Advisor as the harbinger of a new hard-line approach to global politics. Note how since his arrival, the US has pushed forward with the shift of its Israeli embassy to Jerusalem; announced a seven-year ban on US companies selling technology to ZTE, one of China’s largest tech companies; exited the Iran nuclear deal. On top of these aggressive shifts and the tariff announcements are the ongoing NAFTA re-negotiations and the withdrawal from the Trans-Pacific Partnership and the Paris Climate Accord.
The ‘golden thread’ of these actions appears to be a deliberate strategic attempt to manipulate policy for geo-political advantage – particularly as a response to growing Chinese economic and political influence. So, the tariffs most likely point towards a desire by the US to realign political and economic incentives in its favour. After all, Trump’s election manifesto did point to a new vision of ‘America First’. The administration’s most recent actions starkly reinforce this.