During Donald Trump’s presidency, the gap between rhetoric and policy reality has at times been wide. The need to gain congressional approval has reined in, or even derailed, initial proposed changes. But, on trade policy, the US President enjoys considerable unilateral authority. This is partly why Trump’s announcement of tariffs on steel and aluminum has sparked fears of a wider trade war. Last week’s resignation of Gary Cohn, Trump's anti-protectionist senior economic advisor, further fueled these concerns, as it suggested that free trade advocates are losing the argument within the administration. Reports that the White House is mulling broad curbs on Chinese imports and M&A in response to intellectual property (IP) violations only added to investor unease.
But last week also provided less negative developments which, while they don’t reverse the current tilt towards protectionism, may at least slow the pace of anti-trade measures.
- The White House softened its initial stance on metals, granting tariff exemptions for Canada and Mexico. This should reduce risks of small scale metal tariffs derailing NAFTA negotiations, at least in the near-term.
- US commerce secretary Wilbur Ross, writing in the Wall Street Journal, struck a measured tone. He provided detail on the administration’s national security concerns and suggested the new tariffs should help create new steel jobs and shouldn’t lead to a trade war.
- The Comprehensive and Progressive Agreement for Trans-Pacific Partnership was signed, bringing preferential trade terms to 11 economies that generate 13% of global GDP. The trend towards stronger trade links appears intact at a regional level.
- The EU's proposed targets for retaliation – high profile US brands including Levi's jeans and Kentucky bourbon whisky – have an estimated economic value of just USD 3.5bn. This suggests that trade barriers remain politically focused rather than economically significant for now.
So our base case remains one of one-off tariffs on specific industries, and that this will not cause a full-blown international trade conflict. We retain a risk-on stance and are overweight global equities.
That said, escalation remains a risk and we are closely monitoring developments. Over the coming six to 12 months we see a 20-30% chance of a full-scale trade war. If Trump is serious about sharply reducing the country's trade deficit with Asia, particularly China, he might consider trade restrictions on the IT consumer electronics supply chain. Telecommunication and data-processing equipment account for about USD 130bn of the US-China bilateral trade deficit and such a move would be a serious trade shock.
Investors who wish to protect their portfolios against the risk case of a full-scale trade war should ensure they are not overexposed to exportoriented equity regions (Germany, Japan) or sectors (machinery, car manufacturing), and ensure adequate global diversification, including assets in the US, where some sectors could benefit directly from the tariffs (e.g. steel manufacturers). Overall, the potential risk from an escalation in trade frictions is another reminder of the benefits of maintaining a well-diversified investment portfolio.
Global Chief Investment Officer WM
With fresh US tariffs on steel and aluminum and the possibility of broader curbs on Chinese imports, fears of a trade war have escalated. But country exemptions, limited retaliation thus far, and a new regional trade deal may help slow the pace of protectionism. Our base case is that a full scale trade war will be avoided, but escalation remains a threat and investors may want to consider measures to ensure they are adequately diversified against the risk case.
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