Markets take threat of a trade war seriously Jameel Ahmad
Historically speaking, protectionism doesn’t work. When the US Congress raised duties on imports in the wake of the Great Depression (an effort designed to protect American industry), the result was a prolonged downturn.
And yet, once again, the US administration is touting protectionist agendas that have put them on a collision path with the second-largest economy in the world. In recent weeks, US President Donald Trump proposed $50 billion in tariffs on Chinese goods, followed closely by an additional $100 billion in import taxes. China responded with its own equally high tariff proposals, threatening to hit back so hard that America would “remember the pain.”
The ensuing volatility has plagued stock markets in particular recently. A speech by President Xi Jinping on Tuesday offered some relief. The Chinese leader struck a conciliatory tone that went some way towards pacifying volatile Asian markets. While President Trump didn’t feature in the speech, Xi’s call for other countries to “reject power politics” and avoid “seeking dominance”
Investors may see a pronounced safehaven buying trend with increased interest in the Yen and Gold instruments was surely aimed at the Oval Office. Could this be the start of a world order in which China, not the US, is the de facto champion of international trade?
The fact that Xi is now apparently refusing to engage in a tit-fortat trade war shows just how important the ongoing quest for liberalisation is to the General Secretary. Geopolitical spats are hard to predict, particularly with Donald Trump involved. One speech from the President isn’t likely to pacify the markets for long.
International stock markets have reacted very sensitively to the sparring between Beijing and the White House. It’s hardly a surprise: the major players in the affected industries are largely publicly-traded companies with bottom lines at stake. While China and America grate against each other and threaten the global economy, many publicly-traded, multi-national companies face enormous challenges going forward. Despite the impact on equities, currency markets remain largely unconcerned, suggesting that the threat of a trade war hasn’t yet been priced into portfolios.
My hope is that a trade war can be avoided, given the knock-on effects on global growth and investor confidence. The best-case scenario is that President Trump is using the same tactics we saw him employ over Steel and Aluminum tariffs to negotiate a better trade deal with China. On the other hand, we could be giving Trump far too much credit — his protectionist agenda is more than a political gimmick and has already hurt the United States. Trump’s withdrawal from the Trans-Pacific Partnership has already limited American exporters’ access to foreign markets.
Looking ahead, investors may see a pronounced safe-haven buying trend with increased interest in the Yen and Gold instruments; much depends on levels of risk appetite and confidence. The more risk-averse the markets become, the more likely it is that safe-haven instruments will gain. Investors are hyper-aware of the fragility of global economic growth and remember the pain of the recent slowdown only too well. The writer is global head of Currency Strategy and Market Research. Views expressed are his own and do not reflect the newspaper’s policy.