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What risks from the US-China trade tariffs?

2 April 2018

Three experts from Fidelity International provide their view on the situation

Markets have been on edge in recent days over fresh concerns that trade tensions between the United States and China could escalate further. Fears of a trade war have increased due to plans for punitive tariffs on as much as $60 billion in imports from China announced Thursday by the administration of US president Donald J. Trump. The US now has 15 days to announce what products it will target.

On Friday, China’s commerce ministry announced its own plans for $3 billion in tariffs on imports of US pork, steel, recycled aluminium fruit, ginseng and wine. So far, the targeted amounts are relatively modest compared to a bilateral trade in goods between the two countries of more than US$600 billion. For example, the Trump administration’s previously announced tariffs on imports of steel and aluminium would actually have a minimal impact on China. China’s steel exports to the US accounts for about 0.1% of total production, and aluminium exports are around 2% of total production.

However, the risk is that these recent tariff announcements mark the beginning of difficult trade conversations across a number of sectors between the world’s two largest economies.

Tim Orchard, CIO, Equities, Asia-Pacific ex-Japan

“Over several decades, the global economy has clearly benefited from bilateral and multilateral trade liberalisation initiatives that have incrementally lowered barriers to trade. Whilst there might be a temptation to use trade barriers to redress the costs that trade imposes on certain industries in any one country, in aggregate the costs of protection typically exceed any benefit received for an individual economy. Whilst the current proposals for tariffs are limited, there is a risk that this might escalate and become more damaging. It is this risk that markets have recently started to focus on.”

Bryan Collins, Head of Asian Fixed Income

“Overall, the news related to trade protectionism will lead to pockets of volatility, although considering the supportive macro fundamentals, this will likely present itself as potential buying opportunities subject to careful issuers and securities selection. Besides exports, consumption is a key pillar for Asian markets’ growth. In China, consumption contributed to over 60% of 2017 GDP, as the economy is transiting from a manufacturing and export driven economy to a service and consumption based one. India has a more self-contained economy, which makes it relatively insulated compared to other export-driven economies. Equally helpful is the stable quality of Indian credit. On the other hand, Indonesia could be more impacted.”

Yee Kok Wei, Equity Portfolio Manager

“Every new US president always thinks they can do a better job than their predecessors at improving the US trade balance. But generally, they don’t succeed because trade is a complex issue, and with increased globalisation, everybody’s interest becomes too intertwined to be solved by an easy fix like trade tariffs. A trade deficit is no longer a straightforward zero sum game of a trade deficit country versus a trade surplus country, due to the globalised supply chain and globalised ownership of corporations.

“Trump’s current trade strategy does not even have broad support domestically, let alone internationally, mainly because it is a bad approach that does not play into the US’s strength. The TPP (Trans-Pacific Partnership), if implemented, would have been a better approach for the US to take. The last US president that managed to get significant concessions from trade partners was Reagan. It was different then, as Reagan was a largely popular president with broad domestic support, and with an ongoing cold war, he had the luxury of significant security leverage with trade partners.

“I believe Trump will have to eventually reverse course, so maybe the markets going down harder and faster in the near term might be a price worth paying.”


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