Blast from the past on autos tariffs

Thought of the day

by Chief Investment Office 19 Feb 2019

The danger of a trade conflict over the auto industry has resurfaced. The EU has threatened to retaliate if US President Donald Trump imposes tariffs on European cars, amid reports that a US government report has concluded that auto imports from the continent constitute a threat to US national security. This risk had largely faded from market attention last year after an agreement was reached between the US and EU.

Tariffs on the auto sector would especially harm the German economy. A 25% levy by the US would shave about 0.2% off its long-run GDP growth, according to Ifo estimates. German car exports to the US are currently worth USD 34bn annually.

This doesn't necessarily pose an immediate threat to markets, and the auto-heavy DAX in Germany – the industry has an 11% index weighting – opened flat. S&P 500 futures were only fractionally lower, suggesting little concern. With the US auto industry urging the president to refrain from further tariffs, we believe the exchange is most likely part of posturing necessary in negotiations.

But the episode should remind investors that trade risks have not vanished:

  • Markets have somewhat priced out the risk of a renewed escalation in trade tensions between the US and its main partners. Global stocks are now up 10% this year in local currency terms, and nearly 15% since the December low. The rebound has been driven largely by a combination of dovish signals from the Federal Reserve and expectations of a positive conclusion to trade talks between the US and China.
  • The spat over autos should remind investors that the US administration has a protectionist bent and periodic flare-ups in trade tensions are likely. As recently as December, Trump dubbed himself "Tariff Man" and tweeted that "when people or countries come in to raid the great wealth of our nation, I want them to pay for doing so."
  • The rivalry between the US and China is deep-seated, and tensions will remain even if the current round of talks succeed. A US government security review concluded that China's government "is implementing a comprehensive, long-term industrial strategy to ensure its global dominance."
    So we believe that tail risks on trade remain. With global growth and earnings also slowing, we favor only a modest overweight to global stocks, backed by hedging in case risk scenarios materialize.

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