Trading on uncertainty about tariffs

INVESTORS supposedly hate uncertainty, but the uncertainty of a 90-day delay to extra tariffs on China turned out to be better than the certainty of extra tariffs – for a day. Stocks soared on Monday as markets welcomed the cease-fire over the weekend in the US-China trade spat, only to collapse on Tuesday as hope faded.

The uncertainty is likely to keep hurting the world economy. Companies that were delaying investment decisions are hardly likely to put plans into action on the basis of a temporary truce.

The different public announcements by the two sides should have given little confidence that there was a meeting of minds between President Trump and his Chinese counterpart, Xi Jinping.

When Trump labeled himself “Tariff Man” investors realised they may have been wrong to be so positive.

Uncertainty may be part of the US strategy.

The theory is two-fold. Firstly, China is more reliant on trade, so any damage to trade will hurt the Chinese economy more. Secondly, investing in China is a bet on a rules-based global trading system that will protect extended supply chains.

Bring that system into doubt and China becomes less attractive to businesses because of the risk of interruption to components or finished goods.

The flip side could be that uncertainty about trade makes investing in the United States more attrac- tive. The theory here would be that the United States is the world’s biggest consumer market and companies will want to produce closer to the final destination if they are concerned about global supply chains.

Extra costs for components made in Ohio could be worthwhile for executives concerned that cheaper Chinese components might suddenly soar in price due to tariffs, or be hit by other trade barriers slowing delivery times.

Steven Davis, professor of international business and economics at Chicago Booth, says there is little sign of extra investment so far. Jointly with the Federal Reserve Bank of Atlanta, he created a regular survey of business uncertainty. This summer he asked roughly 1,000 businesses about trade and capital spending.

Out of the one-fifth that had reassessed capital spending in light of tariffs, only one firm had increased spending at that point, with 14% accelerating existing plans. But 31% postponed or dropped previous plans.

Where the United States is certainly succeeding is in creating doubt about trade rules.

A global index of economic-policy uncertainty jointly created by Davis is at its highest level since just after Trump was elected.

A trade-policy uncertainty gauge for the United States is close to the two-decade high reached this summer when North American Free Trade Agreement talks appeared in trouble.

Trade uncertainty within China is at a new high, according to an experimental index.

A strategy of deliberate uncertainty might be partially undermined by the new US-MexicoCanada Agreement, also signed in Buenos Aires.

The United States wanted this reworking of Nafta to come with built-in uncertainty in the form of a five-year sunset clause, but that was extended to 16 years, probably long enough to ensure confidence.

If companies do decide to relocate supply chains away from China, Canada and Mexico are now obvious alternatives to the United States, with reliable market access as well as trade deals elsewhere.

Still, China is likely to suffer more than the United States both from tariffs and from doubts about trade rules.