Potential positives amid the trade gloom

Thought of the day

by Chief Investment Office 21 Mar 2018

Investors remain worried over the threat of a trade conflict, amid reports that the US could slap tariffs on Chinese imports worth up to USD 60bn as early as Friday. The potential restrictions would be a response to alleged Chinese intellectual property violations and policies that make technology transfer a condition of doing business in the country.

But while broad tariffs directed at China could result in a spiral of retaliation, a more positive outcome is also possible:

  • President Trump’s claims that he is seeking to level the playing field are supported by the data. According to the World Trade Organization, the average tariff applied by the US across all goods and to all countries is 3.5%. This contrasts with China’s average of 9.9%. This could strengthen Trump’s hand in negotiations.
  • China already appears open to making concessions. Premier Li Keqiang on Tuesday said that China wants to avoid a trade war and plans to further open the manufacturing sector, without forcing foreign companies to transfer technology to Chinese firms.
  • China is not the only major country that imposes larger tariffs than the US. So, too, does every major economy, including the EU (5.2%), Japan (4%), Russia (7%), India (13%) and Brazil (13%). US threats to raise tariffs to achieve “symmetry and reciprocity” could incentivize others to reduce tariffs to achieve a more level playing field.

Escalation remains a risk; over the next six to 12 months, we see a 20–30% chance of a full-scale trade war. Our base case remains for one-off tariffs which benefit specific industries, and that this will not cause a full-blown international trade conflict.

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