Tit-for-tat stops short of a full blown trade war

Thought of the day

by Chief Investment Office 18 Jun 2018

Eurozone stocks slipped and the safe haven yen edged higher on 18 June following the latest tit-for-tat tariff exchange between the US and China. The White House on Friday gave details of a list of USD 34bn worth of Chinese goods, from pacemakers to turbojet engines, which will face 25% import tariffs, effective 6 July. China swiftly responded with its own list of USD 34bn worth of goods it will tax, from soybeans to autos and orange juice. Both tariff lists will grow to USD 50bn as more measures are activated, with China warning it will target new US shale energy imports.

But, behind the headline increase in tariffs, we still believe a full-scale trade war that disrupts global equity markets can be avoided:

  • The latest developments are not negative for overall global trade. Both countries appear to be targeting products that their other trading partners can readily supply. For now, this means tariffs are likely to have more of a redistributive than negative impact.
  • The aggregate direct economic impact of measures announced thus far is small. UBS estimates that the 25% additional tariffs on USD 50bn of Chinese exports may lower China's GDP growth by 0.1 ppt as a first round impact and may raise CPI by 0.1-0.2 ppt. The Chinese government has also previously stated it would use policy to support domestic demand to offset any significant external weakness.
  • China has reiterated its willingness to negotiate. The China Daily said on 18 June that "China’s stance has been consistent - it welcomes dialog but is not afraid of a trade war."

The situation continues to evolve and we are monitoring developments closely, such as the potential for, and likely scope of, a further round of retaliatory tariffs. For now, we believe a negotiated settlement remains possible. Based on this view, we remain overweight global equities, but given that a trade war is a genuine threat to the global business cycle we also hold countercyclical positions and downside equity protection.

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