Trump’s new trade war threats knock stocks back

● A sea of red descended on traders’ screens on Friday after US President Donald Trump warned that he could slap another $100billion (about R1.2-trillion) of extra tariffs on China’s imports, fanning fresh fears of a fullblown trade war between the two superpowers, dealers said.

Trump ratcheted up the rhetoric against China, saying he had instructed his trade officials to “consider whether $100-billion of additional tariffs would be appropriate”.

“Trump’s announcement of a potential further $100-billion of tariffs on China briskly ended any hopes of an amicable conclusion to escalating trade tensions,” said London Capital Group analyst Jasper Lawler.

World equities had powered higher on Thursday as investors judged recent trade war fears were overblown.

However, Frankfurt, London and Paris equities languished in negative territory on Friday, as Trump’s warning loomed large.

“Stock markets in Europe are in the red . . . as trade war fears have been ramped up,” added analyst David Madden at CMC Markets.

“Overnight, President Trump warned China he might seek to impose more tariffs. Dealers are fearful this will result in a fullblown trade war, and equities are feeling the pain.”

Asian stocks mostly receded on Friday. Tokyo finished in the red, losing 0.4%. There were also losses for Seoul and Sydney, while Shanghai was shut.

Hong Kong, however, outperformed regional peers with a sizeable 1.1% gain, with the market playing catch-up after Thursday’s closure.

Trump had already asked for $50-billion worth of Chinese goods to be punitively taxed, which has sparked a formal challenge from Beijing at the World Trade Organisation. China has unveiled plans for painful import duties targeting politically sensitive US exports, including soybeans, aircraft and cars.

Meanwhile, a top European Central Bank (ECB) official warned on Friday that world economic output could fall as much as 1% in a year if Trump sparked a trade war with the US’s partners.

“According to ECB staff simulations, world trade in goods could fall by up to 3% already in the first year after the change in tariffs and world GDP by up to 1%,” central bank board member Benoit Coeure said.

ECB economists modelled a scenario where the US raised tariffs on all imports by 10 percentage points and its trading partners responded in kind. “Such a scenario would have significant adverse effects on the global economy, including, and in particular, on the economy that raises tariffs in the first place,” Coeure said, according to a transcript provided by the ECB.

US gross domestic product would be 2.5% lower after one year compared to no new tariffs, the ECB found.

First it was steel and aluminium. Now it is frozen pork and pistachios. This week it could be computers, and the week after that planes. With this week’s decision by the Chinese leadership to retaliate against US President Donald Trump’s tariffs with levies of its own, the global economy is on the brink of one of the most serious trade wars of the modern era, with potentially billions of dollars of imports and exports at stake. If it happens, it will be terrible for every country, and every stock market. Any kind of restriction on trade destroys wealth on an epic scale. But just like any other war, some countries and some industries will be affected more than others. When Trump suddenly imposed a range of tariffs on imports of steel and aluminium into the US, there was a chance that the rest of the world might decide it was just Donald being Donald, and turn the other cheek. That would have been the sensible response. Any kind of tariff hurts the country imposing it more than anyone else, and if Trump wanted to damage the American economy, that was his problem. Unfortunately, that kind of maturity is in short supply. China has now hit back with tariffs targeting the American goods it imports, such as frozen pork and wine. The chances of Trump deciding to call a truce? Somewhere between zero and 1%. Meanwhile, the EU is threatening to wade into the brewing conflict with its own tariffs, targeting iconic American goods such as motorbikes.

A trade war is the last thing the world needs. The recovery from the financial crash of 2008 has been long and painful, but there were signs that everything was getting back on track. All the major economies have been expanding, the amount of stuff shipped around the world is growing once more and emerging markets are sparking back into life. A round of tariffs, and potentially the breakdown of the multilateral trade rules, could destroy that and plunge the world back into recession. If it is going to happen, you might as well be on the right side of it. There are three ways investors can limit damage to their portfolios.

First, avoid the surplus countries. Trade wars are bad for everyone, but are worse for countries that export a lot more than they import. They are especially likely to be targeted for tariffs, and because so much of their industry is based on selling globally, they will be hit harder. China is the most obvious example. But Germany is arguably even more vulnerable. Its trade surplus has hit a crazy 8% of GDP, and its factories can’t afford to lose those orders. There are other countries with big surpluses that could be hit hard as well, such as Japan, South Korea, the Netherlands and Switzerland. They are all best avoided.

Next, get out of the dollar. A Bank of America Merrill Lynch survey of major investment houses found that 19% of them would short the dollar as a response to a looming trade war. There is plenty of logic to that. The American currency is dependent on surpluses recycled into dollars to sustain massive trade and budget deficits. If that money gets repatriated, then it will get hammered.

Finally, avoid targeted industries right down to the level of specific companies. In emerging markets, it is manufacturers of basic materials such as steel that are most at risk. Food products are uniquely vulnerable, which puts big exporters at risk. Again, steer clear of Germany (surprisingly, it exports a lot of food), France and the Netherlands (which export vast quantities of vegetables and live plants). Cars are vulnerable because most major countries have an auto industry, and it employs lots of people.

A trade war will be bad for the global economy and stock markets. The merest hint of tariffs has been enough to force sharp corrections in the past two months. But every setback affects each country and sector in different ways, and tariffs are no different. Investors should be hoping it doesn’t happen — but at least be preparing for the possibility that it might.

A trade war will be bad for the global economy