Features

Trump fires first shots in trade war

Donald Trump has fired the first shots in a US-China trade war, slapping tariffs on $34bn of Chinese imports, with another $16bn to follow soon.

904_MW_P04_markets

Harley's move to Europe: an unintended consequence of US protectionism

President Donald Trump "has fired the first shots in a US-China trade war", says Fidelity's Tom Stevenson in The Daily Telegraph. He has imposed tariffs on $34bn of Chinese imports, with another $16bn to follow soon. China says it will respond in kind, and Trump has now raised the prospect of duties on all $500bn of Chinese imports. "Add in the threats he has levelled" at Europe and Canada, and "the potential for a $1trn trade war is clear to see".

Let's not panic just yet, say Will Denyer and Tan Kai Xian in a Gavekal Research note. The US government's recent tariffs on steel and aluminium imports, in conjunction with those on $34bn of China's goods, will merely raise the effective US tariff rate on overall imports from 1.4%, the average figure since 2000, to just 2.2%. Decades of global trade liberalisation have gradually reduced the figure from 10% in 1945.

So it wouldn't be much of a reversal. And keep in mind that businesses and consumers can substitute Chinese imports with products from other countries to some extent, while some will be able to shift to domestically produced alternatives.

Beware the indirect effects

This is partly why estimates of the impact of the tariffs are not especially worrying. The tariffs will reduce US GDP by only 0.03% in the third quarter of 2018, according to an estimate by Moody's Analytics, which isn't much for an economy worth $20trn. Similarly, JPMorgan notes that the first round of US tariffs apply only to 2% of China's exports, says Christopher Beddor on Breakingviews. And even the drag on the Chinese economy from 25% levies on all Chinese exports to the US wouldn't be that bad. JPMorgan reckons that China's growth in those circumstances would slow by a mere 0.5%.

The trouble is, however, that modelling the damage is hardly an exact science, says The Wall Street Journal's Justin Lahart. Consider, for example, Harley Davidson's announcement that it will shift production to Europe from the US to avoid the EU's tariffs on its motorbikes. "A typical economic model" might predict lower sales owing to the tariff, but it wouldn't foresee a wholesale move offshore, which implies a bigger reduction in GDP. Gauging the impact of uncertainty and confidence is tricky too. In modern supply chains unfinished goods are imported and exported several times during the manufacturing process, so the effect of tariffs would be magnified.

Stocks are starting to shake

This sort of calculation is unnerving equity investors, explaining why US and Chinese stocks have "swooned", says Beddor. Some American companies have said they are reducing or delaying investment because of the trade outlook. That will undermine earnings growth soon. Stockmarket slides also damage overall economic confidence. Many economists may not be too worried yet but equities are beginning to sense just how ugly this could get.

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
America’s “SPAC” boom is coming to Europe
Stockmarkets

America’s “SPAC” boom is coming to Europe

SPACs are shell firms that list on the stockmarket in order to raise cash, then merge with another company. Once confined to the US tech scene, Europe…
4 Mar 2021
YouGov's Global Banking & Finance Report 2021

YouGov's Global Banking & Finance Report 2021

How COVID-19 is “changing finance” – a high-level overview of financial attitudes, preferences and habits in 17 global markets, encompassing payments,…
1 Mar 2021
Why the classic 60/40 investment portfolio may no longer work
Investment strategy

Why the classic 60/40 investment portfolio may no longer work

The dramatic events in the bond market have thrown into question the classic investment strategy of the last 40 years. An investment portfolio made up…
1 Mar 2021

Most Popular

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
3 Mar 2021
Why gold has been such a bad investment so far this year
Gold

Why gold has been such a bad investment so far this year

Gold – the ultimate safe haven investment – is proving anything but safe. It’s lost over $200 an ounce since its high at the start of the year. Domini…
3 Mar 2021