Trad­ing on uncer­tainty about tar­iffs

The Star Malaysia - StarBiz - - The Wall Street Journal - By JAMES MACK­IN­TOSH

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.

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