Trade war – more of letting off hot air so far
Counter tariffs between US and China send markets into tailspin... which later recover
TO quote Shakespeare, it’s much ado about nothing in the financial markets.
Global markets have been hammered over the last six weeks on fears of a trade war. This week was especially intense.
As of Tuesday, the market has digested the fact that the Trump administration was planning 25% tariffs on US$50bil worth of Chinese imports.
China hit back Wednesday when it announced that it would levy 25% reciprocal tariffs on 106 US products including soybean, automobile, aircraft, tobacco and chemicals. The plans match the US$50bil of tariffs that the US imposed.
This follows Trump’s first move in early March, to sign an order to slap a 25% tariff on global steel imports and 10% on aluminium.
As expected, the Dow Jones Average along with other global financial markets went into a tailspin – but this time, for less than a day.
You see, human beings have such short memories.
In early March, when Trump first announced his steel and aluminium tariffs, followed by the resignation of Gary Cohn, the head of Trump’s National Economic Council, the Dow fell by 350 points at its low that Wednesday. Within days, it had recovered.
Sure, in the past, protectionism measures have typically caused financial markets to fall.
Should other countries retaliate by imposing tariffs of their own, it would flatten US exports and subsequently lower corporate earnings.
However, the current tariff moves by Trump actually arise from the White House’s investigation into China’s use of pressure and intimidation to obtain American technologies.
Now before we once again panic and go into alarmed mode, perhaps we should first look into the numbers and see how severe the impact actually is.
Fisher Investments MarkerMinder explains just how toothless this week’s tariffs are along with the likely reason for it.
“Beijing and Washington don’t really want to bring each other to heel, but to the negotiating table. While the tariff targets are politically sensitive, economically, they are small, mostly hitting categories with minimal trade. Even the categories where the impact is larger seem heavy on symbolism: “The weight of China’s retaliation comes down to six categories: Cars, soybeans, plastics, tobacco, sorghum and chemicals.
“There’s a canny political strategy buried in that list: The first three sectors are heavily concentrated in Midwestern states stretching from Ohio to Wisconsin that flipped from supporting Obama in the 2012 election to Trump in 2016. Tobacco and sorghum farms, too, tend to be in traditionally conservative areas of the South – Texas, Virginia and North Carolina – where Democrats have been making increasing inroads,” it says.
More importantly, Fisher Investments MarketMinder says these political nuances give the Trump administration a high incentive to compromise over the next several months.
“This list doesn’t become final until the end of a public comment period, and the tariffs could be delayed for six months after that.”
“Seems to us like both sides are trying to talk tough, a classic pre-negotiating tactic. The chest-thumping might weigh on sentiment for a while, but over time stocks should benefit as trade-related uncertainty falls,” it sums up.
Moody’s Investors Service more or less agreed that the financial impact is limited.
In its latest note, it said: “Although the macroeconomic impact of tariffs may appear limited when measured by the dollar value of goods affected, if such tariffs are seen by global market participants as signaling an escalation in trade tensions, they will eventually have a broader macroeconomic impact by dampening market sentiment as well as business investment decisions.
Small impact
So that more or less sums up this weeks’ view on the trade war. The financial impact is small, and the issue is being blown out of proportion. Hence let markets swoon and gyrate in different directions.
Afterall, with almost 10 years of a non stop upward trajectory of the Dow, this downward force in some strange way, ought to provide some comfort for those waiting for that much anticipated correction.
Hence, let the trade war fears slowly die down over the next few months. Once this ebbs down, perhaps closer to the fourth quarter, it could just be about time for the next leg up for the Dow.
So this week, the retaliation from China towards the US’ slapping tariffs on its products actually hastened the “end” of the trade wars.
The US is allowing 60 days for public feedback and hasn’t specified when the tariffs would take effect, leaving a window open for talks.
The Trump administration has indicated it’s willing to negotiate with China on escalating frictions between the world’s two biggest economies, helping to ease fears among investors of a tit-for-tat trade conflict.
Meanwhile, when the Trump administration’s steel and aluminum tariffs went into effect last Friday, they exempted Canada, Mexico, the EU, Argentina, Australia, South Korea and Brazil – combined, the source of at least 63% of US steel imports and 48% of US aluminum imports. (Russia is reportedly seeking an exemption too).
This is another example of Trump putting out big threats initially and eventually compromising and watering them down.
Now at the crux of all this is that American companies doing business in China have long bickered that China uses a range of tactics to force them to transfer intellectual property, and that Chinese entities engage in widespread theft of US trade secrets.
The products targeted by the White House are part of its plan to go after China’s dominance in cutting-edge technologies like semiconductors, electric vehicles and advanced medical products – industries that China is pursuing power in as part of an industrial plan known as “Made in China 2025”.
The designation of targeted products will be followed by a comment period in which American companies can provide feedback to the Trump administration on the product choices. The administration will hold a public hearing on the submissions on May 15 in Washington, and companies will have until May 22 to file final objections.
Mildly negative
Fisher Investments MarketMinder says that all else equal, these tariffs and countermeasures are mildly negative. It does not expect major market impacts because they are small in scale, accounting for a tiny slice of global gross domestic product (GDP).
Fisher Investments MarketMinder is of the opinion that the tariffs’ goal appears to be inducing China into more closely adhering to US intellectual property rights and letting US firms access China’s market without surrendering trade secrets and other intellectual property.
“Part of the strategy for goading China into reform appears to be targeted tariffs on imports in competitive industries that are easily substitutable from other countries,” it added.
According to US trade representative Robert Lighthizer, the admin- istration believes this will minimise the impact on US consumers, namely because they don’t actually intend for anyone to pay the tariff.
White House officials believe the tariff rates should be sufficiently high to block trade with China in these categories, allowing other trading partners to step in and fill the gap.
This is because high tariffs targeting Chinese goods in competitive industries, based on to their plan, will make most of the targeted Chinese imports uncompetitive, thus making it irrelevant whether the rate is 25%, 50% or even 100%.
“This is why scaling these tariffs by multiplying tariff rates and import values could very well overstate the impact,” explains Fisher Investments MarketMinder.
Now setting aside speculation, Fisher Investments MarketMinder says that even if we base calculations on the raw numbers thrown out by the Trump administration, the potential impact is tiny.
“US imports are 15.3% of GDP. With roughly 63% of steel and 48% of aluminum imports originating from countries exempted from the tariffs, the total value of imports subject to new tariffs is approximately US$66bil (US$50 bil from the new China tariffs, US$7.3bil from steel and US$8.6bil from aluminum),”
Assuming 10% tariffs on aluminum and 25% tariffs on the rest, and assuming no changes in trade (oversimplified, but this is for illustrative purposes) the levies amount to about US$15bil, which is 0.5% of US imports and 0.076% of US GDP, it says.
Meanwhile, US exports are 12.2% of GDP. Assuming US GDP of US$19 trillion, back of the envelope figures would show that China’s announced tariffs would result in levies amounting to 2.16% of US exports and 0.26% of US GDP.
The impact on China would be equally small. Chinese imports make up some 17% of GDP. The Chinese GDP in 2016 was US$11.2 trillion. Back of the envelope calculations would show that its US$50bil tariffs on US imports would equal roughly 2.62% of Chinese imports and 0.45% of China’s GDP.
We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the United States.
Donald Trump