Investors have become more sanguine about the outlook for global trade amid signs of progress on US–China talks. So it is unwelcome news that the US is considering fresh tariffs on USD 11bn of EU products – from civilian aircraft to a selection of agricultural goods – in retaliation for EU support for Airbus. The tariffs would come ahead of US talks with the EU over autos, which the US has designated a national security threat. Past rounds of tariffs from the Trump administration appear to have curbed corporate investment and weakened market confidence.
But there are reasons for cautious optimism that the latest move does not signal a return to the darker days of escalating trade tensions:
- The dispute is taking place within the framework of the World Trade Organization. This reduces the potential for a spiral of retaliation. In addition, given the often skeptical approach of the Trump administration to the WTO, anything that strengthens international trade structures can be seen as positive.
- US consumers are in a strong position to tolerate the additional taxes without cutting back spending. Unlike previous rounds of tariffs from the Trump administration, which were more harmful to the corporate sector, the latest proposed tariffs would hurt US consumers directly, with extra levies on a variety of European cheeses – from Roquefort to pecorino – fresh fruit, seafood, and motorcycles. While this would be unhelpful, the US consumer sector is strong, with unemployment close to a 50-year low and solid payroll growth.
- There is nothing in the proposed tariffs that is likely to hurt company supply chains. This could help explain the relatively relaxed approach investors have so far taken to the issue. Asian markets advanced today, with the CSI 300 up 0.5%.So while we advise against complacence on trade tensions, we believe that the broader market impact from this trade spat can be contained, assuming a sober response from trade negotiators in Europe. We retain a modest risk-on stance in our tactical asset allocation position.
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