Investment Insights: Trade war’s back on the menu
This weekly report presents insights from our Global Investment Management team.
Global stock markets have tumbled over the last several days as geopolitical strife continues to drag on investor confidence.
After a brief lull filled with political summits, the U.S. and China are back at each other’s throats on trade. Last week, President Trump announced a 25% tariff on $50 billion worth of Chinese products and added that more taxes would be levied if China retaliated. The threat failed to stop Chinese officials from striking back with a very similar proposal of a 25% tax on $50 billion of U.S. goods like soybeans, cars, and even crude oil. The tit-for-tat battle took another step closer to all-out trade war on Monday when Trump, as promised, requested a list of $200 billion in Chinese imports that would be taxed at 10% – and another $200 billion if China responds in-kind. China’s Ministry of Commerce pledged that it would retaliate to protect its national interests and labeled the action as blackmail.
Investors have become more and more concerned as each side shows no signs of backing down. Chinese stocks have been hardest hit, as shown by the Shanghai Composite sinking almost 4% yesterday. Since the first trade war salvo was launched last week, global stocks have fallen 1.67%, with the largest losses coming from international markets, according to MSCI data. U.S. markets have stayed fairly resilient despite the trade conflict; the S&P 500 declined 0.70% over the same period. Safe-haven assets like U.S. Treasuries have gained amid the volatility and uncertainty. The 10-year yield dropped below 2.90% on Tuesday as prices rose. While financial markets are reacting to rhetoric from both sides, there seems to be one constant in this particular squabble – talk is cheap.
So far, most of these tariff announcements have been nothing more than talk. Excluding the solar panel and metals tariffs, the previous bout of proposals between the two largest countries in the world amounted to just posturing. While there is a very real possibility of the trade war becoming a harsh actuality, there may be a limit to these trade escalations. The U.S. and China have the world’s largest bilateral trading relationship with goods worth over $630 billion flowing between the two countries in 2017, according to the U.S. Department of Commerce. However, the same 2017 data show that the U.S. imported around $500 billion from China, but only exported goods to China worth about $130 billion. If you are keeping tally at home, the U.S. is close to taxing a total of $450 billion in goods, which means Trump can add one more tariff worth $50 billion before there is nothing left to tax. Similarly, China doesn’t have much more room to increase tariffs, either.
The Global Investment Management team is cautious over the short term, as implementation of these tariffs would have rippling effects on inflation, select business sectors, and consumers in the U.S. and global economies. Based on our own analysis of the current stage in the economic cycle, our team is looking to take profits in stock exposures in our strategies and increase allocations to select sectors of the bond market. Even solid economic data can get lost at the bottom of the page with these types of headlines around the globe. Our main concerns continue to surround international trade and the Fed’s rate path. The limits to the tariff escalations could end up being an even bigger problem if the trade war spills into items outside of just trade.
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